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Personal Loans are different from. Car Loans

Personal Loan

Car Loan

Special Considerations

The Bottom Line

Automobile Ownership Loans

Personal Loans are different from. Car Loans: What’s the Difference?

How they function along with the pros and pros and

By Christina Majaski

Updated May 02, 2022

Reviewed by Thomas Brock

Personal Loans Vs. Car Loans: An Overview

If you’re looking for a major purchase like an automobile, you might well need to take out a loan to cover the cost. Personal loans as well as car loans represent two commonly used financing options. Assuming you meet their respective criteria for lending, they could be relatively easy to obtain.

What’s the difference between them? A personal loan could be utilized for a variety of purposes, including buying automobiles, whereas a car loan (as the name suggests) is strictly to purchase an automobile. Every loan type has its own pros and cons; it’s crucial to weigh and compare them prior to signing on the dotted line.

Key Takeaways

A personal loan can be used to serve a number of different reasons, whereas an automobile loan is solely for the purpose of buying an automobile.

A personal loan may be secured by something of value, or more commonly, unsecured.

The car loan is secured by the vehicle you intend to purchase. This means the vehicle serves as collateral in the loan.

In any case, having good credit generally means that it’s easier to be approved and to be offered better loan terms.

Personal Loans compare to. Car Loans

Investopedia • Sabrina Jiang

Personal Credit

A personal loan gives the borrower the funds of a lending institution (generally one that is a banking institution), in one lump sum, which the borrower can utilize at their own discretion to pay for, for example, an event like a wedding, vacation, or home improvement.

A personal loan can be secured by something that is valuable, like the home or vehicle which allows the lender to seize the asset in order to cover its losses if you don’t repay the loan. But, the majority of people choose to take out an unsecured loan, which means the loan is made without collateral.

Two key elements that affect the amount of money you pay on a loan include the rate of interest and the loan time. A personal loan calculator is an excellent tool to figure out how these factors will affect the amount you pay each month.

Rates of Interest

Generally the majority of the majority of unsecured loans generally have higher interest rates than similar secured loans with collateral attached. Unsecured personal loans have more stringent acceptance requirements, meaning you’ll want excellent credit on your side. If your credit is in bad health, a personal loan isn’t the best alternative.

Your credit score will affect as well the loan amount and the rates of interest, and can be fixed or variable. The higher your credit score, the greater your borrowing capacity, and the lower the interest rate. Conversely, the poorer your credit score will be, the lower your borrowing capacity and the higher your rate.1

Pros

There are no restrictions on how the funds are spent

Flexible payment structure (short versus long term)

Cons

Rates of interest are likely to be on the high side

Tougher lending requirements

Consumers with poor credit scores won’t qualify

The Terms

Personal loans have a set repayment period, stated in months—12, 24, 36, etc. The longer loan terms will lower the amount you pay each month, but you’ll have to pay more interest over the duration of your loan. On the other hand, shorter loan terms result in more monthly repayments but pay less overall interest, since you are paying off the principal sooner.

Many lenders will allow online personal loans and it’s not uncommon to be approved for an auto loan right there at the dealership.

Car Loan

A car loan is secured against the vehicle you intend to purchase, meaning the car acts as collateral for the loan. If you default on your obligations the lender has the right to confiscate the car. It is a loan is paid off in fixed installments over the course of the loan. Like a mortgage the lender will retain ownership of the asset until you make the final payment.

To figure out what rates of interest and loan time frame will best meet your needs before you head to the dealership, consider trying out an automobile loan calculator before you make your purchase.

Interest Rates

Since the lender controls the financials over the vehicle—it’s a secured loan—the loan is considered to be a lower risk that generally results in a significantly reduced interest rate for the lender. Rates of interest remain fixed meaning that they aren’t subject to the escalating rates that could be associated with personal loans.

Pros

Usually, a lower interest rate

Easy to get with poor credit history

Often a convenient «on the on the spot» option for financing

Cons

You don’t have title to the vehicle until the final repayment has been made

An upfront deposit is generally required to secure the loan

The Terms

The majority of car loans are fixed at 36,48, 60 or 72 months. And just like the personal loan, the shorter the duration, the higher the monthly installment and the reverse is true. A less than average credit history will not necessarily prevent you from getting you getting your vehicle loan (unlike personal loan). It will also have less influence on the rate of interest or the amount you borrow, which is dictated by the price of the car.2

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

Special Beacons

Whatever you decide to do, whether a loan for personal use loan and a auto loan rates and offers differ among institutions. Make sure you do your research and compare offers to find the best deal. Look into credit unions, banks as well as different lending options to discover the most effective combination of rates of interest and loan lengths to make a reasonable monthly installment.

The Bottom Line

When it comes to buying a new car, many people will prefer an auto loan that is financed by a dealer loan because it’s quick and convenient. But in some cases it may be better to take out a personal loan instead. For a more informed choice, start by asking you these inquiries:

Have I collateral which I can be able to secure the loan?

What interest rate (and related payments) could I actually afford?

Does my credit appear to be in good shape?

The decision between them all comes down to taking into consideration the pros and cons in light of your individual circumstances.