Buying A Car With A Personal Loan
Buying a car is a huge financial commitment. When deciding to purchase a car, it isn’t possible for everyone to pay in cash. Hence, one of the preferred options for obtaining a new vehicle is through an auto loan. While taking a car loan directly from the bank or dealership is especially common, personal loans are equally effective.
Keep reading to understand how interest rates and repayment terms vary to help identify the option that ideally fits your budget.
Personal Loan Vs Auto Loan
An auto loan is the most common way of financing a new car, but a personal loan can also be used to buy the car. Here are some notable differences to consider when deciding between these options:
- The majority of auto loans are secured loans wherein the car is used as collateral. If you fail to repay the loan on time, the lender has a legal right to repossess the car. By comparison, unsecured personal loans don’t need collateral to secure the borrowing.
- Auto loans are meant only to finance your car buying needs whereas personal loans can be used to fund almost any expense that you deem fit.
- Depending on your credit score and income, you might get a better rate on an auto loan as compared to a personal loan.
- You’ll be required to pay a down payment to secure an auto loan. There is no such requirement when taking a personal loan.
Things To Weigh Up
The right choice depends on your auto loan requirements. However, listed below are some major factors that you should consider before making a decision:
- Length Of The Loan - Most car loans have flexible repayment terms of 36 to 72 months. The shorter the term, the lower the interest amount you’ll pay over the life of the loan. Personal loans have a set repayment term and are less flexible than auto loans.
- The Type Of The Vehicle - Since auto loans are collateral-based, lenders will review the value of the car you wish to buy. The price and age of the car dictates the interest and terms you’ll be offered. Personal loans don’t have any restrictions on the type of vehicle or its age.
- Credit History - A credit score is the primary factor that lenders will use to evaluate buyers. If you have better creditworthiness, you’ll be eligible to receive a lower APR on an auto loan. Even if you have a low score, you can still get approved for a secured car loan. Still, obtaining a personal loan at the best rates demands stellar credit. You won’t find many subprime lenders willing to take on the risk of issuing personal loans without collateral.
Why A Personal Loan Is A Good Idea
If you are considering a personal loan, here are some reasons why it can be a beneficial strategy. Contemplate them carefully before arranging the purchase using this option.
- Collateral - If you are buying the car of your choice with a personal loan, the vehicle purchased would not be collateral for the loan. Certainly, if you have good credit and the ability to repay the loan in a timely fashion, this factor is largely irrelevant.
- Quicker Cash Approval - Since these types of loans are an agreement between two parties, extra paperwork is not required. Thus, you can obtain the amount you require promptly.
- No 3rd-party Involvement - To put it simply, whatever you take the loan for, you are not answerable to anyone other than the lender. Owing to that, if you have some other commitments that you need the money for, you can use it there.
When Is It A Bad Idea?
Although a personal loan can be an enticing option, it might not fit your financial needs properly. When deciding if it fits your requirement, consider these factors as well:
- Credit Score - It is no surprise that personal loans for bad credit are not the most satisfactory solution in this situation. If you have less than the required credit score, chances are that you won’t get approved for the loan.
- High Interest & Shorter Repayment Term - Most personal loans are unsecured loans. As a result, the interest rates can be much higher than secured loans, increasing your monthly repayments dramatically. Additionally, these loans don’t offer lengthened repayment terms, which translates to higher monthly payments.
- Lower Loan Amounts - Most personal loans aren’t explicitly meant for purchasing vehicles. Accordingly, you might not be able to obtain the total amount required to buy a car. In general, most personal loans have a fixed cap or loan limit that might not be enough to cover the cost of the vehicle.
To select the most suitable loan option for your financial circumstances, you should check rates from multiple lenders. Depending on choice and credit score, you should decide which option best suits you based on your preferred repayment timeline, interest rates, and loan amounts.
Irrespective of the type of loan you choose, make sure to compare all available offers across multiple lenders to receive the best rates and terms available.