Lifestyle / 21st August 2021
Purchasing a new car is a huge investment. It’s a substantial purchase that usually requires expending a tonne of cash that some people don’t have on hand. This is why most individuals look for financing options from loan companies, willing to cover the cost. There are two common financing options: car loans and personal loans. We’ll explain the difference below, so you can weigh which option is best for you.
A personal loan can be used for a wide variety of purposes. This type of loan can be used to consolidate debt, pay for house repairs, cover wedding expenses, pay off car repair expenses, and of course, finance a car. A car loan, on the other hand, is strictly used to purchase a vehicle.
Personal loans come in two different kinds: unsecured and secured. A secured personal loan means your loan is secured against something of value, which can be in the form of a vehicle or property. This allows the lender to seize your assets if you don’t repay the loan.
An unsecured personal loan, on the other hand, is a loan made without collateral. However, it almost always entails higher interest rates since borrowers don’t need collateral to obtain this kind of loan. Unsecured personal loans also come with much stricter approval requirements, including better credit standing.
One of the major differences between the two is that personal loans generally come with higher interest rates than car loans. Why? A car loan is secured against the vehicle you plan to purchase. This means the vehicle serves as collateral for the loan, making it easier for the lender to seize the vehicle should you default on repayments. Given that the lender has security over your car, the debt is considered lower risk. This also means lower interest rates for the borrower.
Personal loans have a set of repayment period stated in months – 12, 24, 36. Generally, the longer the loan term is, the lower repayments are. However, this also means paying more interest over the length of the loan. Conversely, shorter loan terms entail higher monthly repayments, but less interest to pay overall.
Car loans are almost always fixed at 36, 48, and 60 months. The terms are the same with personal loans. However, having a less-than-average credit standing won’t significantly impact you from obtaining a car loan versus a personal loan.
When you choose to finance a car with an unsecured personal loan, you have the liberty to buy any make and model you want as long as you can afford the loan for it. Additionally, you don’t need to pay anything for the down payment. Your lender will also not repossess your car shall you default on your loan. The only con to this option is that unsecured personal loans are much more expensive in the long run because of higher interest rates.
Obtaining a car loan is much more affordable to pay off. Plus, you don’t need to have a good credit score to apply for a car loan. Though a higher credit score will help, having a less-than-average score is not necessarily a cause of concern. One of the cons of car loans is that you may not be able to borrow for all cars. There are requirements to the car's age, make and model before lenders can finance it. Car loans also require a down payment. If you don’t have one saved up, it can be more challenging to get approved. Lastly, since car loans are secured, lenders can repossess your car if you fall behind on payments.
Whether you decide to apply for a personal loan or a car loan for your new vehicle purchase, you have to remember that rates and deals will always vary between institutions. This is why you need to shop around for the best interest rates, affordable monthly payments, and ideal loan length specific to your situation. It also helps to ask yourself the following questions:
Answering these questions can help you make a more informed decision on whether you're going to apply for a personal loan or a car loan instead.
At MoneyShop, we try to make the most options available to you! We offer easy unsecured loans, including car loans! Get access to the funding you need with an agreeable loan length that makes monthly payments more manageable. Ready to know your options for a loan? Our friendly team is more than happy to guide you through the process. Contact us today!