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Personal Loans vs. Car Loans
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Personal Loans vs. Car Loans: What’s the Difference?
How they work and the pros and pros and
By Christina Majaski
Updated May 02, 2022
Review by Thomas Brock
Personal Loans Vs. Car Loans: An overview
If you’re in the market to purchase a large purchase such as an automobile, you might well need to take out a loan to cover the expense. Personal loans as well as auto loans represent two commonly used choices for financing. If you satisfy their criteria for lending, they could be relatively easy to obtain.
What’s the difference between the two? Personal loan is a great option for many different purposes, including buying automobiles, whereas the car loan (as the name suggests) is strictly to purchase a vehicle. Every loan type bears its own pros and cons; it’s important to consider and weigh them before signing on the”dotted line.
Key Takeaways
A personal loan is a great option to fulfill a variety of purposes, whereas an automobile loan is solely for the purpose of purchasing a vehicle.
A personal loan may be secured by something of value, or typically, unsecured.
A car loan is secured by the car you plan to purchase. This means the vehicle serves as collateral in the loan.
In any case, having good credit usually means it’s easier to get approved and receive better loan conditions.
Personal Loans vs. Car Loans
Investopedia / Sabrina Jiang
Personal Credit
A personal loan can provide the borrower with money from an institution of lending (generally an institution like a bank) in a lump sum that the borrower can use at their discretion to pay for, for example, the occasion of a wedding, vacation or for home improvements.
A personal loan may be secured by something of value, such as a vehicle or home and allows the lender to seize the asset in order to cover its losses if you fail to repay the loan. However, the majority of people opt for an unsecured loan, which means the loan is made without collateral.
Two key elements that affect the amount you pay for the loan is the interest rate and the loan term. The personal loan calculator can be a useful tool for determining what these elements will impact what you’ll pay for every month.
Rates of Interest
In general, 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 score isn’t in good shape, a personal loan isn’t the best alternative.
Your credit score can affect equally the loan amount and amount of the interest that could be variable or fixed. The higher you credit rating, the greater your borrowing capacity, and the lower your interest rate. The lower your credit score, the lower your borrowing capacity , and the higher the rate.1
Pros
There are no limitations on how money is spent
Flexibility in the payment structure (short and long-term)
Cons
Interest rates likely to be on a high side
Tougher lending requirements
Consumers with poor credit scores aren’t eligible.
The Terms
Personal loans come with a predetermined repayment period, stated in terms of months: 12 months 24, 36, etc. Longer loan terms can reduce the amount you pay each month, but you’ll be paying more interest over the duration that you take out the loan. On the other hand shorter loan terms mean higher monthly repayments, but will pay less interest overall because you’re paying back the principal faster.
Many lenders will accept online applications for personal loans and it is possible to get approved for an auto loan on the spot at the car dealership.
Car Loan
Car loan is secured against the vehicle you intend to purchase. This means the car acts as collateral in the loan. If you fail to make your obligations the lender may seize the auto. The loan is paid off in installments fixed throughout the loan. Similar to a mortgage, the lender is still in control of the asset until you make an end-of-year payment.
In order to determine what interest rate and loan term would best suit your needs before you head to the dealership, you should consider experimenting with an automobile loan calculator to begin.
Interest Rates
Because the lender is in control of financial decisions over the vehicle–it’s a secured loan–the debt is considered as less risky, which generally translates to lower interest rates for the person who is borrowing. Rates of interest remain fixed meaning that borrowers are not subjected to the escalating rates that could be associated with personal loans.
Pros
Usually a lower interest rate
Easier to obtain with mediocre credit history
It is often a practical “on the instant” financing solution
Cons
There is no title to the car until the final repayment is made
A down payment upfront is usually required to guarantee the loan
The Terms
Most car loans are fixed at 36,48 or 60 months. And just like the personal loan, the shorter the duration the greater the monthly installment and vice versa. A credit score that isn’t as good as average won’t necessarily stand between you and the car loan (unlike a personal loan). This will also have a lesser influence on your interest rate or borrowing amount that is determined by the cost of the car.2
There are a variety of ways to qualify for auto loans. Before signing for a dealer loan it could be worthwhile looking into whether the local credit union or bank could offer an even better deal.3
Special Considerations
Regardless of whether you choose the loan for personal use loan as well as a vehicle loan rates and discounts differ between lenders. So do your homework and compare offers to find the most competitive rate. Check out credit unions, banks as well as various lending institutions to determine the best combination of rates of interest and loan lengths that will allow you to afford a monthly payment.
The Bottom Line
When it comes to purchasing a new car, many consumers will opt for an auto loan that is financed by a dealer loan because it’s easy and easy. In some instances it’s better to take out an individual loan instead. In order to make an educated decision, start by asking you these inquiries:
Have I collateral with which to secure the loan?
What interest rate (and associated payments) can I really afford?
Is my credit in good enough shape?
Deciding between the two is a matter of considering the advantages and disadvantages in light of your individual situation.
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Signature Loan
Signature loan is a type of personal loan provided by banks as well as other finance companies. It relies only on the borrower’s signature and promise to pay as collateral.
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Collateral Definition, Types, & Examples
Collateral is an asset lenders accept as security to extend the loan. If the borrower fails to repay, then the lender may confiscate the collateral.
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A non-recourse debt is a type of loan that is secured by collateral, usually property, and in which the lender takes on a higher risk of default if the borrower does not pay on the loan.
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Find out how personal loan rate of interest works, the ways rate types differ in their rates, and what the average interest rate is for a typical personal loan.
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