Car Loan vs Personal Loan: Which Is Better for Buying a Car?

A car loan vs personal loan comes down to one trade-off: a car loan is cheaper because the vehicle secures the debt, but a personal loan gives you more flexibility because the car stays unencumbered. On a $25,000 purchase, the interest difference can be $3,000 or more over five years. Here is how to decide which one suits your situation.

Why this comparison matters in 2026

The average new car sold in Australia now costs over $46,000, and even the average used car loan sits at $28,658 (ABS, Lending Indicators). At these amounts, the difference between a secured car loan rate and an unsecured personal loan rate is not just a rounding error. With the RBA cash rate at 4.10% following consecutive hikes in early 2026, lender rates have widened the gap between secured and unsecured products. Choosing the right structure can save you thousands.

Car loan vs personal loan: the key differences

A car loan (also called vehicle finance) is a secured loan where the car itself is registered as security on the Personal Property Securities Register (PPSR). Because the lender can repossess the vehicle if you default, the risk is lower and so is the rate.

A personal loan used to buy a car is typically unsecured. The lender has no claim on the vehicle, which means you can sell the car at any time without needing to discharge the loan first. The trade-off is a higher interest rate.

What a car loan actually costs vs a personal loan

Here is a worked example on a $25,000 car purchase over five years, comparing a competitive secured car loan rate against an unsecured personal loan rate. Both assume no deposit and monthly repayments.

Subject to lender approval, terms, and conditions apply. Rates are illustrative. Your actual rate depends on your credit profile, income, and the vehicle.

That $2,940 gap widens on larger loan amounts. On a $40,000 car, the same rate difference would cost roughly $4,700 more over five years with a personal loan.

When to choose a car loan

A secured car loan makes sense when you are buying a newer vehicle (under 7 to 10 years old) and plan to keep it for the full loan term. The lower rate saves you money, and the PPSR registration is a minor administrative detail if you are not planning to sell.

Car loans also work better for larger amounts. Because the vehicle backs the debt, lenders are comfortable approving higher amounts, sometimes above $100,000 for newer cars. An unsecured personal loan typically caps at $50,000 to $75,000.

If your credit score is strong (above 700 on the Equifax scale), you will see the biggest rate advantage with a secured car loan, where rates can start from 5.99% compared to 7.25% or higher for an unsecured personal loan.

When to choose a personal loan

A personal loan is the better option when you need flexibility. If you are buying a car you might sell or trade within a year or two, not having the vehicle tied to a PPSR registration means you can sell without needing lender approval or a payout figure.

Personal loans also work for older vehicles. Most car loan lenders restrict the vehicle to under 12 to 15 years old at the end of the loan term. If you are buying a reliable older car for $8,000 to $12,000, a personal loan avoids the age restriction entirely.

They are also useful when you want to bundle costs. A personal loan can cover the car purchase, insurance, registration, and accessories in a single loan. A car loan covers only the vehicle purchase price.

Which is better by situation

How your credit score affects both options

Your credit score matters for both products, but it affects them differently. With a car loan, the vehicle as security partially offsets a lower credit score, so you may still get approved at a reasonable rate even with a score in the 500 to 600 range.

With an unsecured personal loan, your credit score carries more weight because there is no security for the lender to fall back on. Below 500 on the Equifax scale, unsecured personal loan rates can exceed 18% to 20%, at which point a secured car loan is almost always the cheaper option. You can check your credit score for free through Equifax, Experian, or illion before applying.

This article is general information only and is not financial advice.