If you’re getting a loan to purchase a new set of wheels, a car loan is not your only option. You can also use a personal loan to finance your purchase. So what’s the difference between the two, and why would you choose one over the other? Let’s find out.
Car loans vs personal loans
A car loan is not very different from a personal loan. However, as the name implies, a car loan can only be used to purchase a new or an old car. On the other hand, a personal loan will allow you to borrow funds for various purposes, including your upcoming holiday or purchasing a vehicle.
Lenders also have stringent criteria and restrictions around car loans. For example, most car loans are secured. It means you’ll most likely be required to use your car as collateral, and the lender may seize your vehicle if you default on repayments. Some lenders also won’t allow you to purchase a used vehicle past a certain age, which might restrict your options if you’re shopping on a budget.
A personal loan, on the other hand, can either be secured or unsecured. An unsecured personal loan doesn’t require any kind of collateral, but you might have to pay a higher interest rate if you’re getting an unsecured personal loan for a car. Having said that, a good credit score and financial history might help you negotiate a better rate with your lender. You can also get a personal loan to buy a used car. You don’t need to specifically say what you’re buying when you take out a personal loan, meaning you can get a car of your choice without any restrictions from the lender.
If you’re confused between a car loan and a personal loan to finance your car, also consider the type of interest rate you’re most comfortable with. The majority of car loans have a fixed interest rate, while you can find plenty of options for both fixed-rate and variable-rate personal loans.
The advantage of getting a fixed-rate car loan is that you’re going to make the same monthly or fortnightly repayment throughout the fixed term. Having steady repayments makes it easier to budget, but you might find yourself paying more than the market rate if the variable interest rates go down. Meanwhile, with a variable interest rate, you could potentially save money in a low rate environment - or pay more if your lender announces a rate hike.
Overall, a fixed rate car loan does offer you the ability to budget and pay down your loan steadily over the term. However, you’ll perhaps find it hard to get a car loan that’s flexible at the same time. So, if you happen to have some extra dollars at some point in time and decide to pay off the car earlier, you might not be able to do so on a fixed-rate loan without incurring fees.
The decision to get a personal loan for a car or sticking to a car loan or dealership finance can be tricky. Buyers need to consider several factors, including the interest rate and payment terms. Your credit history might also impact your decision. That’s because personal loans are more easily approved for creditworthy borrowers who may also enjoy more competitive rates than individuals with an average score.
However, if you’re going for a regular car loan, an average credit history won’t necessarily stand in the way of approval. In addition, as the interest rate and the borrowing for a car loan also depend on the price of the car, your credit score might have a lower impact on key loan terms compared to a personal loan.
Don’t forget to consider the interest rates for both car loans and personal loans to compare which one is more affordable before opting for dealership finance. Getting your car financed by the dealer is usually quick and convenient, but might cost you more in the long run. It’s always a good idea to compare rates and deals between multiple lenders as it increases your chances of landing a more competitive deal with reasonable terms.