If you are looking to finance a car – your only option is a car loan, right? Wrong.
Despite missing the ‘car’ in the title, a personal loan can be used for a range of loan requirements, including to finance a new car. But which loan is going to suit you best, a personal loan or a car loan?
Personal loans are available for those wanting to borrow money to finance something they don’t have the funds for upfront – that doesn’t include a home. This could be for a holiday, study, renovations or to purchase a car.
Personal loans allow you to borrow an agreed amount, which you pay off weekly, fortnight or monthly until the end of the agreed loan term. But remember, the longer the loan term, the more money you will pay in interest – so take this into account when you are calculating your repayments and term length.
You will have a choice of secured and unsecured loans options – with a secured loan usually offering lower interest rates as the loan is secured against an asset, in case you are unable to make the loan repayments. You also have the flexibility to choose between a fixed and variable interest rate.
If you are taking out a loan for a car, look at the interest rates, fees, repayment options and the early exit penalties when you are comparing loans.
Put simply, a car loan is a personal loan. But whereas a personal loan will allow you to borrow the funds for a variety of purposes, car loans are specifically designed for the purchase of a new or used car only.
The main difference between the two is that car loans are almost always fixed rate loans – so your interest rate will be locked in for the length of the loan term you agreed too. That’s why it’s important to compare a range of car and personal loans so you find a low interest rate at the very beginning of your loan term.
Car loan terms vary from one to five years and will be determined, along with your repayment amount and regularity, at the beginning of your contract. You are then required to pay off the loan in the specified time. If you fall behind on your repayments you will be required to make a lump sum payment at the end of the loan term, which is where some borrowers can get into strife and require refinancing.
Remember, while car fixed rate loans offer you the ability to budget and pay off your loan progressively over the term – they will very rarely offer any flexibility either. So if you come into money and want to pay off the car earlier – you may not be able to, without incurring hefty penalties, on a fixed rate loan.
When you are in a dealership it can be hard to walk away from the convenience of an onsite car finance department but understand that you are still in a position to negotiate on the interest rates being offered to you and to shop around for a better loan rate.
When deciding between a personal loan or a car loan make sure you take into consideration the interest rates, fees, repayment restrictions, loan flexibility and the terms and conditions.
Remember, financing your new car purchase is only part of the costs you will incur so don’t forget to factor in the on road costs – such as registration fees, fuel, services and car insurance.