Unsure whether you should take out a car loan or personal loan? Here’s how to decide.
When you’re looking to buy a new car, part of your research process is likely figuring out what type of loan you should get. Determine how much you can save by comparing loan amounts and interest rates between car loans and personal loans. Our guide will explain the differences and help you work out how much you could save by opting for one instead of the other.
What’s the difference between a car loan and a personal loan?
The exact terms of your loan depends on the lender you choose, but you can expect to find the following features with each type of loan:
These are dedicated loans designed to cover the cost of a car and related expenses such as licensing and registration. You can borrow a car loan from your dealership or your bank, whichever is more convenient for you.
- Secured. A car loan is secured with your vehicle.
- Lower interest rates. Since your loan is secured, your rates will be more competitive. This is because the lender has collateral—your vehicle—as insurance if you default on your loan.
- Longer application. You’ll need to supply more information to your lender, specifically about the make and model of the vehicle you’re buying, when you apply.
- More restrictions. A car loan can only be used for the purchase of a vehicle.
Personal loans are considerably more flexible, and you can find lenders just about anywhere — online, local banks, credit unions and more.
- Unsecured. While car loans are typically secured, personal loans are unsecured and don’t require collateral. This means it relies on your credit and usually has a higher interest rate than a car loan.
- Shorter application. Since you won’t need to provide collateral, personal loans tend to have shorter applications. You’ll simply list the general purpose of the loan when you apply.
- Use the funds for just about anything. Most personal loans will come without strict restrictions on purpose. You should be able to use your funds for the purchase of a car, and if there’s anything left over, you can use the remaining funds to cover other expenses.
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5 questions to ask to help you decide
Both options are valid when you’re looking to buy a new or used car, and your choice should be based on your individual needs. Carefully read the terms and conditions of each loan you’re considering when deciding if it’s right for you. Not all car loans are alike, and the terms of personal loans can vary widely.
Here are some things you should consider:
- Are you expecting your financial situation to change? If you’re anticipating a change in your financial situation, there’s a good chance a personal loan is a better choice. An unsecured loan may carry less risk in an uncertain future, and if you opt for variable rates, you’ll likely be able to take advantage of additional repayments without a penalty fee.
- Do you know what car you want to buy? Getting preapproval for a car loan allows you to know exactly how much you can spend when shopping for a new or used vehicle.
- Are you buying a used car? Buying used instead of new can be an effective way of saving money, but you might not be able to find a used car loan for the car you want and might have to take out a personal loan instead. For instance, some car loans require the vehicle to be less than eight years old. Personal loans won’t have these restrictions.
- Do you have bad credit? Bad credit car loans are available, but you’ll find more options with an unsecured bad credit personal loan.
- Do you want to add extras to your car? It can be costly to make modifications to your vehicle, whether it’s just a new coat of paint or a change to the body of the car. Many car lenders won’t let you add this cost onto your loan. With a personal loan, you can add this cost onto the loan amount to have additional money for the extras.
At the end of the day, the most effective way to compare loans is by looking at specific options side by side. Using a calculator can help you determine the exact value of each loan.
Compare car loans and personal loans
Step-by-step guide to finding the right type of loan
The following steps should help you find a loan that works for you. This is a guideline, so remember to take into account your personal financial situation when determining what type of loan you want to borrow.
Whether you know which type of loan you’re going with or are still unsure, it’s a good idea to compare your loan options before deciding which lender to go with.
- Check out different providers and assemble a list of loans you’ll likely qualify for.
- Estimate the interest rate and total cost of your loan by getting online quotes or using a calculator.
- Compare the features of the loan such as prepayment fees and rate discounts.
- Decide which loan is more affordable and best suits your needs best.
- Fill out an application and wait to see if you’ve been approved.
Deciding what type of loan you want will impact your finances for years to come. It’s a big decision, and the right choice depends on what you want out of a lender. Take your time to compare all your options and find the loan the suits your needs.