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Personal Loans vs. Car Loans

Personal Credit

Car Loan

Special Takes into Account

The Bottom Line

Vehicle Ownership Automobile Loans

Personal Loans in comparison to. Car Loans What’s the Difference?

What they do as well as the pros and pros and

By Christina Majaski

Updated May 02, 2022

Reviewed by Thomas Brock

Personal Loans vs. Car Loans: A Comprehensive Analysis

If you’re in the market for a significant purchase, such as an automobile, you might require a loan to cover the expense. Personal loans as well as auto loans are two of the most commonly used choices for financing. Assuming you meet their respective lending requirements, they can be relatively easy to obtain.

What’s the difference between them? A personal loan is a great option for various reasons, such as buying cars, while the car loan (as the name suggests) is only used to purchase the vehicle. Each loan kind has its particular pros and cons, so it’s important to consider and weigh them before signing on the»dotted line.

Important Takeaways

A personal loan is a great option for many different purposes while an automobile loan is strictly for the purpose of buying the vehicle.

A personal loan can be secured against something of value, or more commonly, unsecured.

A car loan is secured by the vehicle you are planning to purchase, which means the vehicle serves as collateral to the loan.

In either case, good credit generally means that it’s easier to be approved and also to get more favorable loan conditions.

Personal Loans compare to. Car Loans

Investopedia / Sabrina Jiang

Personal Credit

A personal loan provides the borrower with the funds of an institution that lends money (generally a bank), in a lump sum that the borrower may use at their discretion to pay for, for example, a vacation, wedding, or home improvement.

A personal loan can be secured by something of value, such as an automobile or a home which allows the lender to take possession of your property to pay back the losses in case you fail to pay back the loan. However, most individuals opt for an unsecure loan that is, the loan is made without collateral.

Two major elements that influence the amount of money you pay on a loan is the rate of interest and the loan term. A personal loan calculator can be a useful tool for determining the impact of these variables on the amount you pay every month.

Rates of Interest

Generally generally speaking, the majority of unsecured loans are more expensive in terms of interest that comparable secured loans with collateral. Unsecured personal loans are also subject to stricter approval requirements, so you’ll need an excellent credit score. If your credit is in bad shape then a personal loan might not be an alternative.

Your credit score can affect equally the loan amount and rates of interest, and may be variable or fixed. The higher you credit rating, the higher your capacity to borrow, and the lower your interest rate. Conversely, the poorer your credit rating, the lower your borrowing capacity and the higher the rate.1

Pros

No restrictions on how funds are spent

Flexible payment structure (short versus long term)

Cons

Rates of interest are expected to be on the high end

More stringent lending requirements

People with low credit scores won’t qualify

The Terms

Personal loans have a set time frame for repayment, which is stated in terms of months — 12 months, 24 36, 36 and so on. The longer loan terms can lower the amount you pay each month, but you’ll have to pay more interest over the term of your loan. Conversely shorter loan terms will result in higher monthly repayments, but incur less interest overall, since you are paying off the principal quicker.

Many lenders will accept online applications for personal loans and it is possible to be approved for an auto loan in a matter of minutes at the car dealership.

Car Loan

A car loan is secured by the car you plan to purchase, meaning the car acts as collateral in the loan. If you default on your payments, the lender can confiscate the car. This loan is paid off in fixed installments throughout the duration of the loan. Like a mortgage the lender is still in control of the property until you make the final payment.

To determine which the interest rates and loan duration will be most suitable for your needs before you head to the dealer, think about trying out an automobile loan calculator first.

Interest Rates

Given that the lender is in control of financial decisions over the car—it’s a secured loan—the debt is considered as less risky that generally results in a significantly reduced interest rate for the borrower. The interest rates can also be fixed so the borrower is not subject to the increases that can be a part of unsecured personal loans.

Pros

Usually a lower interest rate

Easy to get with poor credit history

It is often a practical «on the on the spot» option for financing

Cons

You don’t have title to the vehicle until final payment is completed

A down payment upfront is usually required to guarantee the loan

The Terms

The majority of auto loans are set at 36, 48, 60, or 72 months. Similar to a personal loan the shorter the loan term the greater the monthly repayment and the reverse is true. A less-than-average credit history won’t necessarily prevent you from getting you getting your vehicle loan (unlike personal loan). Also, it will have less influence on your rate of interest or the amount you borrow that is determined by the price of the car.2

There are many ways to get car loans. Before you sign up for a dealer loan It could be worthwhile looking into whether the local credit union or bank can give you a better deal.3

Special Takes into Account

No matter if you opt for a loan for personal use loan and a auto loan, rates and deals vary between institutions. So do your homework and shop around for the best price. Look into credit unions, banks, and various lending institutions to find the best mix of rates of interest and loan lengths for an affordable monthly payment.

The Bottom Line

When it comes to purchasing a new car, many people will prefer a dealer-financed auto loan because it’s quick and easy. In some instances it’s more efficient to get an individual loan instead. To make an informed decision, start by asking you these inquiries:

Do I have collateral with that I can use to secure the loan?

What interest rate (and related charges) can I genuinely manage to

Does my credit appear to be in good condition?

Deciding between the two all comes down to considering the pros and cons of your personal circumstances.