Car Financing vs Personal Loan: Which Is The Best Option?

Jan 7, 2022
car loans
By Staff writer

The debate between car finance vs personal loan often comes up when making a new car purchase. Both options have their similarities and of course, their differences when it comes to implementation. If you're thinking of buying a new car, it's best to learn and compare which loan option applies to your needs.

Car Financing vs Personal Loan

The premise between financing a car and applying for a personal loan is the same. You’re essentially borrowing money to later pay off over a longer period of time. That way, you don’t need to pay a huge sum upfront when you’re purchasing a vehicle.

Planned well, this helps make the repayments a lot more manageable. If that’s the case, then what are the main differences between the two? Well, this mostly boils down to the security offered and the institutions where you can get these loans.

Read: Guide To Used Car Financing In NZ

Car Financing

Car financing or a car loan, is often secured against the very vehicle you intend to purchase, meaning that it now serves as collateral. If you default on your repayments, your lender may seize the car you bought. In terms of interest rates, car loans also remain fixed — your rate doesn’t change throughout the loan’s terms, making it pretty good for budgeting. This is due to the secured nature of the loan, deeming it lower risk, leading to reduced interest rates for the borrower.

Most car loan terms are also fixed at 36, 48, 60, or 72 months. The shorter the term, the higher the monthly repayments. Thanks to the security offered by the vehicle you’re purchasing, this also means a less-than-average credit history won’t affect your chances as much.

You can usually secure a car loan from either a car dealership or a private lender. This applies for both used and new vehicles. Getting a loan from a dealership might allow you to get instant approval and drive on the same day. On the other hand, banks tend to have affordable and transparent terms that go a long way in putting the mind at ease.


Personal Loans

Personal loans are funds borrowed from lending institutions, usually banks, that the borrower can usually get in a lump sum to be used for any purpose. You can use it to buy a car, go on a nice vacation, or even renovate your house. 

Personal loans can either be secured or unsecured. Unsecured loans do not require any collateral, though they may have higher checks so a stellar credit history would come in handy. These unsecured loans also typically come with higher interest rates compared to secured loans backed by collateral. These are also affected by your credit score, allowing it to go lower provided your score is high.

Personal loans also tend to have a set repayment period, usually ranging from 12, 24, to 36 months, sometimes longer depending on what was discussed. Longer loan terms mean lower payments per month, but higher interest rates over the life of the loan. 

The biggest upside to personal loans, however, is the flexibility. You can use personal loans for any purpose and you can easily adjust your loan terms. If you have an excellent credit history, you may even borrow a higher amount. This way, you can set a huge downpayment for your car, and still have money left for other things.

Read: How To Find The Best Car Insurance In NZ

Car Finance vs. Personal Loan: which is right for me?

Ultimately, it will depend on your circumstances and the capability to get either one. See which one is more convenient when it comes to application. For some reference, consider going for a personal loan if the following applies:

  • Getting a used car or an older model that might have a hard time qualifying as collateral for a secured car loan.
  • Having an excellent credit score, which can get you a higher personal loan amount and more favourable terms.
  • Unsecured loans also mean no collateral will be lost if you suddenly can’t make your payments.
  • You can also use personal loans for after-market changes to your purchased car, which may not be applicable for car loans.

On the other hand, car financing may be more useful for you if the following applies:

  • Negative credit history, and applying with banks can be difficult
  • Looking to buy a newer model of vehicle that can easily qualify as security for the secured loan.
  • Not wanting to spend as much money over the life of the loan due to lower interest rates thanks to the secured collateral.
  • Looking to negotiate better rates and fees
  • Looking for the convenience of doing everything in just one place, in case you choose to secure your car loan from a dealership

Another thing to consider when choosing to go with car financing is that lenders may also offer you additional insurance such as mechanical breakdown cover. Of course, you do have the option to choose whether you want to get one or not, or if you’re thinking of getting additional coverage from a different provider.

These add-ons are not compulsory so you don’t have to get them if you’re unsure about them.

Doing your Research

Regardless of whether you opt for car finance or personal loan, your overall rates and terms will still vary between institutions. You’ll still need to shop around in order to get the best deals. Compare different providers and available deals to determine which lender will best suit your needs.

It's a lot easier to do this comparison with glimp, as we’ve done the legwork of sorting through the best available deals. So whether you’re interested in taking out a personal loan or securing car financing with a lender, simply use our FREE comparison tool to get started. Enter a few details about yourself and we’ll show you the best deals that match your preferences.

Shane Egan (Popup) , 2023-07-10

Excellent service. Responsive and easy to deal with. Got me an awesome deal on Broadband. Well worth calling to see what they can do. 👍

Jamie Martin , 2023-06-18

Really great service, helped us save about 30% on power plus a free $100 sign up bonus. Very fast and efficient.

Kat W , 2023-06-20

Very helpful and informative. Lovely chatting with them on the phone, helped me find a power supplier, pretty simple and straight forward

Dee Painter , 2023-08-08

So easy to use, very helpful and got a great deal with my power and gas