Personal loans are one of the most flexible types of financing available, but they often get confused with other loan options. Knowing the difference between personal loans and other types of loans can help you make an informed decision based on your financial situation and goals.

What is a personal loan?

A personal loan is a type of loan that allows you to borrow money for almost any personal expense, whether it’s to consolidate debt, cover medical bills, or finance a big purchase. Unlike specific loans (such as car loans or mortgages), personal loans are generally unsecured, meaning you don’t need to put up collateral like your home or vehicle to secure the loan.

Personal loans are typically available through banks, credit unions, and online lenders, offering flexible repayment terms often ranging from 1 to 7 years.

In Australia, banks and lenders offer competitive rates for personal loans, especially for borrowers with a strong credit profile.

Key features of personal loans:

  • Unsecured: No need for collateral.

  • Flexible use: Funds can be used for various personal expenses.

  • Fixed or variable interest rates: Depending on the lender, interest rates can either be fixed or fluctuate.

  • Repayment terms: Typically shorter than mortgages or car loans.

Car loans in Australia: what you need to know

A car loan is a secured loan that is specifically designed for purchasing a vehicle. When you take out a car loan, the vehicle itself acts as collateral, meaning if you default on the loan, the lender can repossess the car to recover the money. Because car loans are secured, they often come with lower interest rates compared to personal loans.

Car loans also typically have shorter repayment terms, usually between 3 to 7 years. However, the loan amount is restricted to the price of the car, unlike a personal loan where the funds can be used for anything.

Key features of car loans:

1. Lower Interest Rates: Since car loans are secured, the risk for the lender is lower, which often results in more favorable interest rates. However, the rates can vary depending on your credit score, income, and the age or type of the vehicle.

2. Loan Amount: The loan amount is typically limited to the value of the car being purchased. Unlike personal loans, where funds can be used for a variety of purposes, a car loan must be applied solely to the purchase of a vehicle.

3. Repayment Terms:

• Car loans generally have shorter repayment terms, ranging from 3 to 7 years.

• Shorter terms mean paying off the debt quicker but might result in higher monthly repayments. Conversely, longer terms reduce monthly payments but increase the total interest paid over time.

Eligibility and requirements

To qualify for a car loan in Australia, you typically need to meet the following criteria:

  • Be at least 18 years old.

  • Have a steady income to demonstrate repayment capability.

  • Provide identification and financial documents (e.g., payslips, bank statements).

  • Choose a car that meets the lender’s requirements (some lenders may not approve older or very high-mileage vehicles).

Whether you're purchasing a new ride or upgrading to a second-hand vehicle, a car loan tailored to Australian borrowers can simplify the process and save money in the long run. Always compare rates, fees, and features from multiple lenders to find the best fit for your needs. Check out our quick and easy car loan comparison calculator to find the best loan deals in Australia.

Mortgages

A mortgage is a secured loan used to finance the purchase of a home or other real estate. The property acts as collateral for the loan, and the repayment term is usually much longer—often 15, 20, or even 30 years.

Mortgages come with lower interest rates compared to personal loans due to the secured nature of the loan. However, they also involve higher upfront costs (such as down payments and closing costs) and more stringent approval processes. The amount you can borrow depends on the property’s value and your financial situation.

Key features of mortgages:

  • Secured by real estate: The property serves as collateral.

  • Low interest rates: Mortgages typically offer lower interest rates because they are secured.

  • Long repayment terms: Usually 15 to 30 years.

  • Specific purpose: Funds are exclusively for purchasing or refinancing property.

Business loans

Business loans are loans specifically intended to help businesses grow, cover operating expenses, or invest in new equipment or projects. These loans can be either secured or unsecured, depending on the lender and the borrower’s financial situation. Business loans generally have stricter approval criteria, as lenders need to assess the viability of the business.

Unlike personal loans, business loans are typically larger and come with specific repayment schedules based on the business’s cash flow. They may also require a detailed business plan and financial documentation during the approval process.

Key features of business loans:

  • Purpose-specific: Funds must be used for business-related expenses.

  • Secured or unsecured: May require collateral depending on the loan type.

  • Varied terms: Loan terms and amounts vary greatly based on the size and nature of the business.

  • Approval process: Requires a detailed review of business financials.

Personal loans vs other loans

Here’s a quick comparison of the key differences between personal loans and other types of loans.

FEATURE

PERSONAL LOAN

CAR LOAN

MORTGAGE

BUSINESS LOAN

Collateral

No

Yes

Yes

Sometimes

Purpose

Flexible

Vehicle purchase only

Property purchase only

Business-specific

Interest Rates

Moderate to high

Low

Very low

Variable

Repayment Terms

1-7 years

3-7 years

15-30 years

Variable


As you can see, the right loan for you depends on your objective, financial plan, and current situation. If you need a loan for a specific purpose like buying a home or car, then a secured loan (mortgage or car loan) over a longer period might be the better option due to lower interest rates. But if you need flexibility, a personal loan could be the way to go.

Understanding the difference between personal loans and other types of loans is crucial when deciding which financing option to pursue. Personal loans offer flexibility and convenience, while car loans, mortgages, and business loans are more specific in their use and terms. 

Why use Lendela?

Whatever your financing needs, Lendela’s unique reverse auction model is designed to bring your most competitive loan options to you, no matter your profile. A simple application gives you access to personalised options from Australia’s top lenders, so you never have to worry about applying with multiple lenders and hurting your credit score.

Lastly, Lendela provides transparent options and information every step of the way, so that you’re always empowered to make an informed decision.