Funding Your Car Purchase: Personal Loans Versus Car Loans

A car is one of two major life purchases that most people will make. Because of the amount of money involved, it’s often a viable option to choose to apply for a loan in order to push through with the car purchase. Sometimes, it’s may even be the superior option to apply for a loan—especially if you don’t want to use all of your cash on a single purchase.

Personal loans and car loans are two of the most popular financing options that most car buyers have access to. Even more convenient is the fact that these loans may even be approved on the spot at dealerships. So, which loan type is a better fit for your needs? Continue reading to find out.

First, we need to differentiate one from the other:

Personal Loans

These loans can be secured in the stead of something of value. They’re basically collateral auto loans wherein you are lent money but you’re required to offer an item of similar value to the loan. In the event that you’re unable to repay the loan, the lender will then have the right to seize the item that you secured the loan with, in order for the lender to recoup its losses.

However, there is such a thing called an “unsecured personal loan” which is technically a personal loan, minus the collateral. And this is the financing option that most car buyers prefer to work with.

But, of course, this isn’t without its trade-offs. An unsecured personal loan often comes with higher interest rates versus its collateral-based counterpart. They are also more difficult to secure. A good credit score is going to be a must if you’re planning on applying for an unsecured personal loan because the loan amount and the interest rate will depend on your credit score.

Car Loans

A car loan is similar to a personal loan except in the way that the vehicle you intend to buy is what’s going to serve as the collateral for your loan. Ergo, if you’re unable to repay the loan, the lender will then have the right to seize the vehicle you used the loaned money to buy. Using this setup, the loan is to be paid off in fixed installment periods. Until the full amount of the loan (and the interest) is paid, the lender is deemed the owner of the vehicle.

Interest rates of car loans are typically lower than that of unsecured personal loans because of the presence of collateral. Furthermore, car loan lenders are less stringent with their approvals, meaning those who have a less-than-satisfactory credit score will still be able to secure a loan from them.

So, which financing option is better for you?

Well, it all really boils down to your capacity to pay (interest rates included), your credit score, and of course, whether you even have something valuable to use as collateral. Those who are more financially capable may be better off with a personal loan, while those who have less-than-ideal credit scores may be better off with using a car loan.


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