If you get a loan to buy a new set of wheels, a car loan isn’t 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.
Auto credit vs personal credit
An auto loan is not much different from a personal loan. However, as the name suggests, an auto loan can only be used to purchase a new or old car. On the other hand, a personal loan will allow you to borrow funds for various purposes, including your next vacation or the purchase of a vehicle.
Lenders also have strict criteria and restrictions regarding auto loans. For example, most auto loans are unsecured. This means that you will likely have to use your car as collateral, and the lender can seize your vehicle if you don’t pay it back. Some lenders also won’t allow you to buy a used vehicle after a certain age, which could limit your options if you’re shopping on a budget.
A personal loan, on the other hand, can be secured or unsecured. An unsecured personal loan does not require any type of collateral, but you may have to pay a higher rate of interest if you get an unsecured personal loan for a car. That said, a good credit score and financial history could help you negotiate a better rate with your lender. You can also get a personal loan to buy a used car. You don’t have to say exactly what you’re buying when you take out a personal loan, which means you can get any car you want without any restrictions from the lender.
If you’re confused between an auto loan and a personal loan to finance your car, also think about what kind of interest rate you’re most comfortable with. The majority of auto loans have a fixed interest rate, while you can find many options for both fixed and variable rate personal loans.
The advantage of getting a fixed rate auto loan is that you will make the same monthly or bi-monthly repayment throughout the fixed term. Having regular repayments makes budgeting easier, but you could find yourself paying more than the market rate if variable interest rates drop. 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 auto loan gives you the ability to budget and pay off your loan consistently over time. However, you may find it difficult to get flexible auto credit at the same time. So, if you happen to have a few extra dollars at some point and decide to pay off the car sooner, you may not be able to do it with a fixed rate loan without incurring charges.
The bottom line
The decision to get a personal loan for a car or stick to a car loan or dealer financing can be tricky. Buyers should consider several factors, including the interest rate and payment terms. Your credit history can also affect your decision. This is because personal loans are more easily approved for creditworthy borrowers who can also benefit from more competitive rates than people with an average score.
However, if you go with a regular car loan, an average credit history doesn’t necessarily stand in the way of approval. Additionally, since the interest rate and borrowing for a car loan also depend on the price of the car, your credit score might have less of an impact on key loan terms compared to a personal loan.
Be sure to consider the interest rates for auto loans and personal loans to compare which is the most affordable before opting for dealership financing. Getting your car financed through the dealership is usually quick and convenient, but can cost you more in the long run. It is always a good idea to compare rates and offers between several lenders, as this increases your chances of getting a more competitive deal with reasonable terms.