Have you ever considered buying a car using a personal loan? Considering that personal loans suit a number of purposes, a car might just be one. How do you know if it’s a wise move to buy a car using a personal loan vis-a-vis a car loan? Let’s explore the idea further below.
Personal Loans vs Car Loans
How does a personal loan differ or compare to that of a car loan?
- From weddings, vacations to schooling, there are no restrictions to what a personal loan can be used for.
- There is no personal asset securing its repayment (collateral).
- Comes with a fixed interest rate with flexible repayment plans.
- Usually requires good credit to qualify for one.
- Specifically made for vehicle financing.
- The car serves as collateral to the loan.
- Also comes with a fixed interest rate and flexible repayment plans.
- Does not necessarily require good credit to qualify for one.
B. Strengths vs Weaknesses
When you buy a car with a personal loan, you don’t need a down payment and a collateral. So if you were unable to pay your loan, the lender can’t seize the car. Anytime during the loan period, you are free to sell it at a good price.
On the flip side, lenders make up for the lack of collateral through higher rates and fees. Personal loans also need a good credit to qualify.
Of course, you’ll end up losing the car if you neglect your car loan obligations.
The costs and rates of a car loan vary depending on the source:
- Dealership: offers in-house financing so you need not go that far to finance. It is also through dealers that you can access 0% manufacturer loans from the captive finance arms of auto makers, e.g. Ally Financial for GM.
- Traditional/alternative lenders: include banks, credit unions and peer-to-peer lending markets. You approach any of these lenders directly for a car loan.
Generally, a dealership-arranged loan costs more than a direct loan from a bank as the dealer can pad it with extra fees and charges in facilitating the loan.
Credit-wise, dealers are more lenient than banks. They accommodate people with bad credit or low scores but this results in higher rates. With banks, you have to go through a stricter underwriting procedure, including compensating your low credit with a high down payment, low debt-to-income ratio and so on.
C. Final Thoughts
Ultimately, the decision rests on which is a more viable solution for you. Opting for a personal loan or a car loan for vehicle financing should be about:
- Shopping with a budget. Have a good grasp of a car you want to drive plus the amount you are likely to spend. A pre-approved amount is a good starting point.
- Focusing on the APR and the total loan amount. Calculate the entire cost of the loan. Don’t get swayed by low monthly payments because they are based on a longer repayment period, costing you more in interest over the life of the loan.
- Fixing your credit. This is your access card to better loan deals and leverage in negotiating your loan terms.