Choosing a financial product is a difficult decision if you don’t know much about finance. But the best finance options you have to buy a car are – a car loan or a personal loan. While both these loan products have their own perks, knowing the distinctions will help you make the right decision.
Personal loans are unsecured loans, whereas automotive loans are secured loans. In a car loan, the new vehicle is mortgaged to the bank until the loan is fully repaid. But a personal loan is extended to you based on your monthly income and credit score. The lender does not seek collateral.
Also, when you apply for a car loan, the lender finances only up to 80% of the car value. But with a personal loan you can finance, 100% of the car’s value and also use the loan amount to pay for insurance, accessories, and more.
Reasons to Use a Personal Loan for Car Purchase
A personal loan to buy a car can serve you better in the following situations:
- If your car lender’s down payment or loan-to-value ratio standards are not something you can fulfil.
- The car lender won’t finance an older used car.
- If you wish to be the titleholder.
- If you want to finance the entire expense related to the car, including insurance, registration and accessories.
- If you want a shorter loan tenure. The tenure of a personal loan ranges between 1 to 5 years, while the tenure of a car loan ranges between 3 to 8 years.
How to utilise a personal loan for a car purchase?
A personal loan is a multi-purpose loan that can be used to finance any purchase including a car. Personal loans give borrowers a lot of flexibility. With a personal loan, the borrower is not tied to buying a specific car. You can purchase a car from anybody you like with a personal loan, including automobile dealers, auto auctions, and private sellers. Additionally, you are not obligated to accept the terms provided by a dealership and are free to shop for the best interest rates and financing conditions.
You may have better control over your spending if you take out a personal loan. You are free to use the money to cover your car insurance or to pay off high-interest credit card debt. No matter what you intend to use the loan for, the application process remains the same.
Secured and unsecured personal loans
Personal loans account for the vast majority of unsecured borrowing. Collateral or an item of value tied to the loan is not necessary for these loans. A secured loan’s lender has the right to seize the collateral if the borrower defaults. Secured loans may have lower interest rates since the collateral lowers the risk associated with the loan application. The lender can auction the vehicle and make up for the loss.
For a personal loan, the lender may consider several factors, including your credit score, credit report, bank accounts, and other costs, before determining whether to approve your loan application. They also determine the interest rate based on your credit score and repayment capacity.
Advantages of Using a Personal Loan against A Car Loan
Depending on your financial situation, a personal loan can be your best option for financing your car purchase. The following are some advantages of using a personal loan:
Quick access to cash
Today availing a personal loan has become much easier with the availability of loan apps. You can easily avail an online loan within a few hours, and the entire process is digitalized. You don’t need to wait for days for financing a new car.
It’s an unsecured loan
Although some personal loans are secured, the majority are not. If your credit score is good, you can qualify for an affordable, unsecured personal loan. If you have already availed a secured loan like a home loan then availing a personal loan can bring a good mix of credit to your profile.
Unlike vehicle loans, personal loans do not specify how you must utilize the money. If you decide against purchasing a car, you can pay off the loan immediately or use the funds for any other purchase.
The choice between a personal loan or a car loan depends on your financial standing and preference. Both loan options serve the purpose of financing a car purchase. No matter what kind of loan you select for your car purchase, you must compare the loan offers from various lenders. You can also use a loan calculator to estimate the cost of your loan. The best loan will ultimately provide you with a cheap rate and favourable terms to make paying for your new car as simple as feasible.