Are you planning to buy a new car? Are you on the lookout for some additional funds to invest in one of your personal projects? In either situation, the best option available to you may be availing a loan.
Car loans and personal loans are two of the most commonly opted for financing options. If you are able to meet the requirements stipulated by lenders, it is relatively easy for you to obtain a loan. Further, most lenders have started accepting applications online for car loans as well as personal loans. Typically, approval for car loans is given on the spot at a car dealership.
Now, the question is how these two loans are different. You can use a personal loan to meet a variety of needs. However, a car loan can be used only for buying a vehicle. You should go for a car loan if your goal is to buy a car, but if you need funds for a different purpose, which is less specific and/or is not included in the typical lending box (for example, a vacation, home improvement, wedding, etc.), availing a personal loan would provide you with more flexibility.
All said and done, there are pros and cons to each type of loan and it is, therefore, important to evaluate and compare them prior to signing any contractual agreement.
1.0 Unsecured Personal Loan
Typically, a personal loan is provided to you by a lending institution. Generally, banks provide personal loans. The lending institution pays the full amount on approval of your application. You can use the amount at your discretion. In general, personal loan amounts range from $ 1,000 to $ 50,000.
Sometimes, a personal loan is secured against an asset such as a home or vehicle. This allows the lender to seize your asset and recover their losses if you fail to repay the personal loan as promised. However, in general, most people choose to avail an unsecured personal loan. This means that there is no collateral associated with the loan.
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1.1 Interest Rates
Generally, the interest rates on unsecured loans are higher than that of loans that come with collateral security. The approval criteria associated with unsecured personal loans are also much more stringent. It is, therefore very important that you have an excellent credit score. If your credit score is not all that good, you may not be in a position to obtain a personal loan till you make it stronger.
The amount of money you can borrow and the interest rate (whether fixed or variable) are generally decided on the basis of your credit rating. If your credit rating is good, your borrowing capacity will be higher and the interest rate will be lower. On the other hand, if your credit rating is poor, your borrowing capacity will be lower and the interest rate will be higher.
The repayment period for a personal loan is specified at the time of borrowing. It is often stated in months, for example, 12, 34, or 36 months. If the tenure is longer, the monthly instalment you pay will be lower, but you will end up paying more in terms of interest over the duration of the loan. On the other hand, shorter tenure results in higher monthly repayments. However, you will pay a lesser amount of money in terms of interest. This is because you are repaying the principal faster.
In a nutshell, the pros and cons of an unsecured personal loan are as follows:
- The lender does not place any restrictions on how you use the loan amount.
- There is some amount of flexibility as far as the repayment structure is concerned, short term vs. long term.
- Interest rates are often on the higher side.
- Typically, the applicable lending requirements are more stringent.
- If your credit score is poor, you will not qualify for availing a personal loan.
2.0 Secured Car Loan
In the case of a car loan, the borrowed amount is secured against the vehicle you are planning to buy. This means that the car is considered as the collateral for the money the institution lends to you. In the event of defaults on repayments, the lender has the authority to seize the vehicle. A car loan is to be repaid in equated monthly instalments over the tenure of the loan. As in the case of a mortgage loan, the ownership of the vehicle rests with the lender till you complete the payments against the loan.
2.1 Interest Rates
As a car loan is considered to be a secured loan (the lender can seize the car if you fail to make payments), the risk involved is less for the lender. Therefore, the interest rate charged will also be less. Moreover, fixed interest rates are charged so that you are not required to pay more, as in the case of an unsecured personal loan, in the event of an increase in the rate.
The car loan tenure options available to you, in general, are 36, 48 or 60 months. As in the case of a personal loan, the shorter the tenure, the higher will be the monthly repayment amount, and vice versa. Typically, a less-than-average credit history will not prevent you from getting a car loan. Your credit history has a lower impact on the interest rate or the amount that can be borrowed because it is dictated by the car’s price. However, you must check with a credit union or a local bank if they can give you better terms prior to signing up for a loan arranged by the dealer.
Summing up, the pros and cons of a secured car loan are as follows:
- Generally, a car loan is available at a lower interest rate.
- It is easier to get a car loan even if your credit history is not so great.
- A car loan is a convenient finance solution because approval is often accorded on the spot.
- You get the title to the car you have bought only after you make the final payment against the loan.
- Often, an upfront deposit is needed to secure a car loan.
When purchasing a new car, most consumers choose to go for a dealer loan as it is quick and convenient. However, a personal loan might be a better choice in certain situations. It is all about weighing the pros and cons in the light of your specific circumstance.