Car Loans vs Personal Loans: What’s the Best Way to Finance Your Car?

Thinking of buying a car in Singapore? You’re not alone—but you’re probably also aware that it’s a seriously big-ticket purchase. Between the Certificate of Entitlement (now $94,502 for a Category A car), insurance, and road tax, the total cost of owning a car can be eye-watering. Paying for a car upfront just isn’t practical—so that’s where financing comes in.

When it comes to taking a loan, you’ve mainly got 2 options: a car loan or a personal loan. Both can help you get behind the wheel, but they work quite differently—and the best choice really depends on your needs, budget, and the type of car you’re buying.

In this article, we’ll break down how each loan works, compare the key differences, and help you figure out which option makes more sense for your situation. 

 

1. What is a car loan?

A car loan is a type of secured loan that’s specifically meant for buying a car. The catch? The car you’re buying is used as collateral—so if you can’t keep up with repayments, the bank can repossess it.

In Singapore, car loans are regulated by the Monetary Authority of Singapore (MAS), which caps how much you can borrow based on the car’s Open Market Value (OMV)—the estimated cost of a car before taxes and COE are added. You can check a car’s OMV on the OneMotoring website (by LTA).

For cars with an OMV of $20,000 or less, you can borrow up to 70%. If it’s more than $20,000, the cap drops to 60%. That means you’ll need to cough up a down payment for the rest.

OMV of motor vehicle	Maximum LTV	Maximum loan tenure
Less than or equal to $20,000	70%	7 years
More than $20,000	60%	7 years

Source: MAS

To give you an idea of what an OMV of $20,000 looks like, a standard Toyota Corolla Altis with a 1.6L petrol engine has an OMV of $19,175, according to the OneMotoring website (by LTA).

Car loans usually offer lower interest rates compared to personal loans, and repayment periods can go up to 7 years. But keep in mind—they can only be used to buy a car, and they’re often arranged through dealerships or banks tied to car brands.

 

2. What is a personal loan?

A personal loan is a flexible, unsecured loan that you can use for just about anything—including buying a car. Unlike car loans, there’s no collateral involved, which means the bank doesn’t hold your car hostage if you miss a payment (though your credit score might take a hit).

With a personal loan, you can typically borrow up to 4x your monthly salary (or more or less, depending on your income and credit profile). For example, these are CIMB’s personal loan borrowing limits:

• Up to 2x your monthly income if your annual income is between $20,000 to $29,999
• Up to 4x your monthly income if your annual income is $30,000 to $119,999
• Up to 8x your monthly income if your annual income is more than $120,000

Personal loans usually offer loan tenures between 1 to 7 years. Interest rates tend to be slightly higher than car loans, but the upside is freedom. You can use leftover funds for insurance, repairs, or even sprucing up your new ride.

If you’re buying a used car from a direct seller or need some extra flexibility, a personal loan could be a better fit. Just be sure to compare interest rates and look out for processing or early repayment fees.

 

3. Car loans vs personal loans—a side-by-side comparison

Now that you know how car loans and personal loans work, let’s break it down further. Here’s a quick comparison of the key differences to help you see which loan might suit you better. 

Feature	Car loan	Personal loan
Loan type	Secured (car used as collateral)	Unsecured (no collateral)
Usage	Only for car purchase	Can be used for anything, including car-related costs
Loan amount limit	Up to 60–70% of car’s OMV	Up to 4–12x your monthly salary (depends on credit profile)
Interest rates	Typically lower (currently around 2.28%–2.78% p.a.)	Wider range, can be higher (ranges from 1.90%–21.60% p.a.)
Tenure	Up to 7 years	Up to 7 years
Approval process	Usually done via dealer or bank	Done directly with bank or financial institution
Flexibility	Less flexible—loan tied to car	More flexible—you’re a “cash buyer”
Early repayment	May incur penalty	May incur penalty

As you can see, both loans have their pros and cons. Car loans tend to come with lower interest rates, but they lock you into using the loan solely for the car. Personal loans give you more freedom, especially if you’re buying from a direct seller or want to cover other expenses like insurance, road tax, or even modifications.

 

4. When should you choose a car loan?

A car loan is a great option if you’re buying a car from an authorised dealer, especially for brand new models or certified pre-owned vehicles. Here’s when it makes sense:

• You’re buying directly from a dealership or COE resale dealer
• You want lower interest rates compared to personal loans
• You’re okay with making a 30–40% down payment upfront
• You don’t mind that the loan is tied to the car (i.e. the car belongs to the bank until the loan is repaid)

To me, the most important advantage of using a car loan is that you’re likely to get a lower interest rate. But money aside, car loans are also usually the more convenient option as they’re often arranged through dealers and seamlessly bundled into the dealership process.

However, remember that because the car acts as collateral, you lose a bit of flexibility. If you prefer predictability and simplicity—and you’re not planning to sell or transfer the car anytime soon—a car loan could be the way to go.

 

5. When should you choose a personal loan?

A personal loan gives you flexibility, especially if you’re buying a used car from a direct seller, a parallel importer, or even bidding for a COE car on your own. It can also help you manage car-related expenses all in one loan. Here’s when it might be the better option:

• You want to buy from a direct seller or parallel importer
• You prefer to be a “cash buyer”—which means paying for your car upfront and thus possibly negotiating a better price when dealing with direct sellers or parallel importers
• You need flexibility to use the loan for other car costs (insurance, road tax, repairs, etc.)
• You’ve already saved up part of the car price and just need to top up the rest
• You don’t want the car to be tied to a loan (i.e. you own it outright from day one)

6. Final thoughts: Which loan is right for you?

If you’re buying a brand-new car from a dealership and want a hassle-free experience with lower rates, a car loan might be your best bet. But if you’re going for a used car, want flexibility, or just prefer being in control of how you spend the funds, a personal loan could make more sense.

There’s no one-size-fits-all answer—it really depends on your financial situation, the car you’re buying, and what matters most to you: lower interest or more freedom.

The good news? Both loan types are widely available, and it’s easier than ever to compare offers online. Just make sure you read the terms carefully, run the numbers, and choose the option that fits your needs. Make use of our car loan and personal loan comparison tools to help you.

This article was first drafted with the help of AI and later reviewed and refined by the author.

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