Which Is Better, Car Finance or a Personal Loan?

June 10, 2023

Could you be interested in acquiring your own vehicle and can’t figure out how exactly you should do this? Well, In a world driven by aspirations and mobility, financing your dream car can be both exciting and overwhelming.

Whether you’re a first-time buyer or a seasoned auto enthusiast, deciding between car finance and a personal loan can seem like a labyrinth of possibilities. But fear not! We will dive deep into this age-old debate to unravel the secrets behind choosing the perfect financing option for your automobile dreams.

Are you ready to embark on a journey where we weigh the pros and cons, explore the nuances, and ultimately guide you toward a well-informed decision? Let’s navigate the exciting world of car finance and personal loans, where the road to vehicular bliss lies just around the corner.

Car Finance: The Pros and Cons

Car Finance The Pros and Cons

Exploring Car Finance Options

1. Hire Purchase (HP)

Hire purchase is a loan agreement that allows you to get a car. You make an initial deposit, then pay regular instalments until the balance is paid off. This type of financing means renting the car from the lender.

You only own the car once all payments have been made and the loan is secured against the vehicle. Once all payments have been completed, ownership will be transferred to you.

If you remove a hire purchase agreement, you can pay an initial deposit at the outset, followed by regular instalments over a predetermined period.

Once all agreed instalments have been paid, the vehicle will be officially yours, and the finance agreement will terminate. If you use a hire purchase contract, you can settle your remaining debt anytime by obtaining a settlement quote from your lender.

2. Personal Contract Purchase (PCP)

A PCP agreement is like a hire purchase agreement. It requires an initial payment and then fixed monthly payments over a set period, usually 2-4 years. This payment plan allows you to spread the cost of the car over a longer period.

At the end of the fixed term, you have a few options. Return the car and walk away. Use the equity from the car as a deposit for a new vehicle.

Pay off the GMFV, a “balloon payment,” to purchase the car outright. This is a great way to obtain vehicle ownership without another loan.

The agreement you sign will include a clause indicating the maximum annual mileage allowed on the car. If this amount is exceeded or any damage caused to the vehicle is not considered normal wear and tear, the lender may enforce additional charges. You need to ensure that these conditions are adhered to to avoid any extra fees being applied.

You can discover additional details regarding any charges associated with your initial financial agreement by conducting further research.

Doing so will help. It will help you understand the terms and conditions better. It will also give you an overview of what both parties should do.

Advantages of Car Finance

1. Lower Initial Cost

Car finance provides an attractive option for those who need the means to pay the full cost of a vehicle upfront. It lets you purchase a car by making an initial down payment and then spread out the remaining balance over a predetermined period. This is incredibly beneficial, as it allows you to save your savings and time when you can afford the total cost.

2. Flexibility in Repayment Terms

Car finance offers a great deal of flexibility regarding repayment plans. You can select an instalment plan that works best for your budget and financial situation, allowing you to make regular payments without putting too much strain on your finances. Most car finance options feature fixed monthly instalments, providing a consistent and predictable way of managing your expenses every month.

This makes it easier to keep up with the payments to pay the loan in full over time. If you have difficulty making your monthly loan payments, one possibility may be to lower the payments by extending the loan term. This option allows you to pay smaller monthly amounts and help your financial situation.

3. Potential Access to Better Cars

Car finance allows you to buy a car that may not be within your current financial means. It allows for more flexibility and enables you to think about purchasing a vehicle that falls outside of what is immediately available in your budget. By utilizing car finance, you can look at cars that would otherwise be beyond your reach.

Drawbacks of Car Finance

1. Monthly Commitments and Interest Rates

When a lender provides the funds to purchase a new car in advance, you will be obligated to pay back the amount lent. Usually, with an additional interest cost. The exact interest rate you will be charged on a loan is contingent upon multiple factors, which include the lender that grants you the loan and your past financial history.

You will likely receive a lower Annual Percentage Rate (APR) if your credit score is strong. Therefore, maintaining a good credit score is in your best interest, which may result in more favourable terms when applying for a loan.

2. Potential for Negative Equity

Potential for Negative Equity is a downside of car finance. It means the value of the car is lower than the loan balance. This can cause serious money problems for car owners.

People often buy a new car using financing, paying down, and borrowing the rest. However, cars usually lose value quickly, especially in the first few years of ownership. This can mean that the car’s value decreases faster than the loan gets paid off, resulting in negative equity.

Car owners can be stuck in a cycle of debt due to negative equity. They may need to roll it into a new loan when buying a new car, which increases the cost and lengthens the repayment time.

3. Limited Ownership Control

Car financing enables people to get a car without paying the full cost at once. However, this comes with constraints on ownership control. These restrictions and limitations are named Limited Ownership Control.

Lenders often need borrowers to buy comprehensive insurance for the car they bought with a loan. This makes car owners pay more for insurance than those who own cars. If the car owner does not buy the right insurance, they might face fines or have their loan taken away.

Additionally, Car financing agreements may limit the mileage a person can drive. Going beyond that limit can bring extra costs or punishments, as the car’s value decreases quickly with more miles. This can be a problem for people who often drive long distances or have long commutes.

Personal Loan: The Pros and Cons

Personal Loan: The Pros and Cons

Understanding Personal Loans

A personal loan is a loan that you can borrow from a bank or other lending institution, with the agreement to repay it over a predetermined period with set, consistent monthly payments. This type of loan can be used for various purposes, such as debt consolidation loan or financing large purchases. It offers you more flexibility than other forms of credit regarding repayment duration and interest rates.

Most personal loans are unsecured, meaning you don’t have to pledge any collateral to receive the loan. This means you won’t be required to put down assets such as property or vehicles as security for the loan amount. Consequently, if you default on payments, there will be no potential for repossession of your possessions and belongings.

Advantages of Personal Loans

1. One lump sum

A personal loan allows you to get the loan payment in one lump sum; it can be simpler to make a big purchase, combine debt, or utilize the loan all at once. Additionally, you’ll receive a consistent interest rate and predetermined monthly instalments, which makes managing the loan less complicated.

The lump-sum payment makes managing your finances more convenient. You no longer need to make multiple payments or worry about late fees.

This arrangement allows you to pay on time more easily and avoid fines. It also makes it simpler to keep track of your money.

2. Greater Financial Flexibility

A personal loan can provide the perfect solution if you need to borrow money for virtually any purpose. This loan can give you options for various financial needs. It can help consolidate debt, fund a home renovation, and cover unexpected costs. It can also provide financial flexibility and peace of mind.

With careful planning and budgeting, taking out a personal loan could be a favourable decision that helps you get back on track financially. As such, it is worth considering when you need to borrow money.

3. Potential for Lower Interest Rates

Personal loans are typically associated with lower interest rates when compared to credit cards. The most recent data from June 2023 shows the average rate for a personal loan was 11.05 per cent. This is much lower than the rate for a credit card, which was 20.44 per cent. This demonstrates that taking out a personal loan could be more financially beneficial than using a credit card.

People with good credit scores may be allowed to get personal loan rates from 10.3 to 12.5 per cent. This could allow them to borrow more money than their credit card limit.

If you have a good credit rating, you can save money by opting for a personal loan instead of a credit card. This type of loan could reduce the interest accumulating on your debt if held on a credit card.

Drawbacks of Personal Loans

1. Higher Initial Cost

In addition to the interest rate charged on your loan, some lenders impose additional fees like application and origination fees to process your loan. These origination fees range from a fairly substantial 2% up to 5% of the total amount you borrowed.

You might also incur a penalty for failing to make timely payments or for insufficient funds if your payment is automatically debited from your bank account. This penalty could be in the form of additional fees, interest charges, or other penalties the creditor imposes.

Your lender may impose a prepayment penalty if you pay off your loan before its scheduled end date. However, this differs from many modern personal loan lenders, who have abolished this fee.

2. Stricter Loan Approval Process

Personal loans can have more stringent requirements than other types of financing possibilities. If you have a low credit score or a limited financial background, the number of lenders willing to provide you with a loan will be severely reduced.

Moreover, particular lenders do not accept co-signers as part of their loan agreement process, even though having a co-signer can be beneficial when securing financing with little or poor credit.

3. Higher Interest Rates

Personal loans usually have competitive APRs, depending on your credit score. However, they can have higher interest rates and fees than secured loans, like home equity loans and HELOCs.

This is because personal loans are unsecured, meaning there is only one asset the lender can take if you repay. To cover this risk, lenders charge more. Personal loan interest rates can be as low as 6% but as high as 36% or even more.

Factors To Consider Before Taking A Car Loan: Making an Informed Decision

Factors To Consider Before Taking A Car Loan

Credit Score

Your credit score is incredibly important in assessing whether or not your application for a car loan will be accepted. It plays a vital role in determining the outcome of the loan process, and lenders generally use this information as one of their main criteria for deciding whether to approve your request.

Before applying for a car loan, you must check your credit score and take any necessary steps to improve it. A higher credit score can be beneficial as it can enable you to qualify for a more competitive interest rate. This will save you money in the long run and reduce the interest you pay on the loan.

Budget And Financial Situation

Before looking for a car loan, understand your financial situation and budget. Examine your monthly income and other costs to know how much you can pay for a car each month.

Remember, a car loan is a big financial commitment that will affect your monthly budget for a long time. Be honest about your finances, and don’t take on more debt than you can handle.

The amount you pay for your car should be no more than 10-15% of your monthly salary. This will help to ensure you can pay for it without any difficulty.

Loan Duration and Interest Rates

When selecting a loan, it is important to consider the term length and choose wisely. A lengthy loan term can reduce your monthly payments. However, this could mean increased total interest paid throughout the loan. When deciding, consider your budget and financial objectives; select a loan term that best fits your needs.

By shopping around and comparing interest rates from different lenders, you can find the best rate according to your situation. A lower interest rate could save you a large sum over the entire duration of your loan, while a higher interest rate may lead to more interest charges. Therefore, it is important to explore all available options when looking for the most advantageous loan terms.

Potential Additional Costs

Many car loans may come with additional charges, such as application fees and charges, origination fees, and prepayment penalties. These types of extra payments can quickly add up and significantly increase the cost of the loan.

It is essential to read the loan agreement and know all associated costs before signing off. Thoroughly analyze each clause to ensure you understand every detail and any fees related to the transaction to decide whether this loan is a good fit for your current needs. Consequently, knowing these extra costs associated with a car loan is important before committing to one.

Frequently Asked Questions (FAQs)

Is Car Finance Suitable For Individuals With Bad Credit?

Some car finance offers are particularly suitable for people with less-than-perfect credit ratings. These deals typically involve lower loan amounts and higher interest rates, as this helps lenders minimize the risk they take in providing you with credit.

Can Personal Loans Be Used For Purchasing Used Cars?

Yes! Personal loans can be used to buy a used or new car. This allows you to pick the best fit for your needs and budget. The loan gives you more freedom to choose, so you don’t have to settle for one option.

What Happens If I Want To Sell The Car Before The Loan Is Paid Off?

You will utilize the funds acquired from the sale to settle your loan and keep the remainder. This extra money can be used however you wish – whether it’s saved away or spent on something special.

Are There Any Additional Fees Associated With Car Finance Or Personal Loans?

The car financing process involves a range of additional expenses that may differ from lender to lender. The costs may include:

  • Excise tax
  • Appraisal cost for the car
  • Processing fees
  • Penalties for late payment
  • Disbursement fees
  • Credit life insurance
  • Installing a vehicle tracker.

Can I Negotiate Interest Rates On Car Finance?

Indeed, the interest rate for the vehicle can be negotiated, just as its price is. With some bargaining and good negotiation skills, one may secure a better deal than originally anticipated.


Choosing between car finance and a personal loan requires carefully considering your circumstances. Assess your financial goals, credit situation, and preferences to make an informed decision. And when you’re ready to embark on your car ownership journey, don’t hesitate to explore the financing options Madman Motors provides. They are committed to helping you make your dream of owning a car a reality.

First-time car buyers and existing vehicle owners alike can turn to Madman Motors. We are one of the best lending institutions licensed by the Australian Credit licence.

We’ll help you find the right financing solution that fits your needs. This includes considering your credit history, the type of car you want, and your budget. Contact us today for a great deal.

Apply For Finance at Mad Man Motors Wangara