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Personal Loans vs. Car Loans

Personal Credit

Car Loan

Special Takes into Account

The Bottom Line

Vehicle Ownership Automobile Loans

Personal Loans vs. Car Loans: What’s the Difference?

How they function and the pros and cons of each

By Christina Majaski

Updated May 02, 2022

Review by Thomas Brock

Personal Loans are different from. Car Loans: A Comprehensive Analysis

If you’re in the market for a significant purchase, such as a car, you might well need to take out a loan to cover the expense. Personal loans as well as auto loans can be considered among the more common financing options. If you satisfy their lending requirements, they can be relatively easy to obtain.

What’s the main difference between these two? A personal loan can be used for various motives, such as purchasing automobiles, whereas a car loan (as the name implies) is strictly to purchase an automobile. Each loan type bears its particular pros and cons, so it is important to consider and weigh them before signing on the”dotted line.

The most important takeaways

A personal loan can be used to fulfill a variety of purposes however an automobile loan is only to purchase a vehicle.

A personal loan can be secured by something that is valuable, or, more commonly, unsecured.

A car loan is secured against the vehicle you intend to purchase. This means the car acts as collateral in the loan.

In any case, having good credit typically means it’s easier to get approved and to be offered more favorable loan conditions.

Personal Loans are different from. Car Loans

Investopedia • Sabrina Jiang

Personal Loan

A personal loan provides the borrower with the funds of an institution of lending (generally a bank) in a lump sum the borrower is able to use at their discretion, such as for a vacation, wedding, or even home improvement.

A personal loan can be secured against something worth something, like an automobile or a home which allows the lender to seize your asset to recover the losses in case you fail to repay the loan. However, most people opt for an unsecured loan, which means the loan is made without collateral.

Two main elements that impact the amount you pay for the loan are the interest rate and the loan term. An individual loan calculator is an excellent tool to figure out how these factors will affect the amount you’ll have to pay 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 attached. Unsecured personal loans have more strict requirements for approval, which means you’ll require excellent credit on your side. If your credit score isn’t in good shape the personal loan may not be an alternative.

Your credit score will affect both the loan amount as well as the interest rate, which may be variable or fixed. The higher you credit rating, the better your borrowing capacity, and the lower the interest rate. In contrast, the lower your credit rating is, the less your borrowing capacity and the higher the rate.1

Pros

There are no restrictions on how the funds are spent

Flexible payment structure (short as opposed to long)

Cons

The interest rates are likely to be on the high end

Lenders are more stringent

Consumers with poor credit scores aren’t eligible.

The Terms

Personal loans have a fixed repayment period, stated in months–12 24, 36, etc. The longer loan terms can reduce the amount you pay each month, but you’ll pay more interest over the term of the loan. In contrast, shorter loan terms result in higher monthly repayments, but incur less interest overall, because you’re paying off the principal faster.

Many lenders will accept online applications for personal loans and it is possible to be approved for a car loan on the spot at the car dealership.

Car Loan

Car loan is secured against the vehicle you are planning to purchase, which means the vehicle serves as collateral to the loan. If you do not make your payments the lender has the right to confiscate the car. This loan is paid off in installments fixed throughout the loan. Much like a mortgage, the lender will retain ownership of the asset until you pay your final repayment.

To determine which interest rate and loan time frame will best meet your requirements prior to heading to the dealership, you should consider trying out the auto loan calculator before you make your purchase.

Interest Rates

Because the lender is in control of financial decisions over the vehicle–it’s a secured loan–the debt is deemed as less risky and, in turn, results in a significantly reduced interest rate for the lender. The interest rates are also fixed, which means borrowers are not subjected to the rate increases that could be a part of unsecured personal loans.

Pros

Usually a lower interest rate

Easy to get with poor credit history

It is often a practical “on the on the spot” finance solution

Cons

There is no title to the vehicle until the final repayment has been made

An upfront deposit is generally required to secure the loan

The Terms

Most car loans are fixed at 36,48, 60 or 72 months. Just like a personal loan the shorter the term is the more expensive the monthly installment and vice versa. A credit score that isn’t as good as average won’t necessarily hinder you from getting your car loan (unlike private loan). This will also have a lesser influence on your rate of interest or the amount you borrow, which is dictated by the price of the car.2

There are numerous methods to obtain car loans. Before signing to an auto dealer loan, it can be worthwhile looking into whether you can find a local credit union or bank could offer the best deal.3

Special Considerations

No matter if you opt for either a individual loan and a auto loan rates and discounts differ between lenders. Make sure you do your research and compare offers to find the most competitive rate. Explore banks, credit unions, and different lending options to discover the most effective combination of interest rates and loan lengths that will allow you to afford a monthly installment.

The Bottom Line

When it comes to buying a brand new car, a lot of buyers will choose a dealer-financed auto loan since it’s fast and easy. But in some cases it’s more effective to obtain a personal loan instead. To make an informed decision, start by asking you these inquiries:

Are I in possession of collateral which to be able to secure the loan?

What rate of interest (and the associated charges) can I really manage to

Do I have my credit in good enough shape?

Deciding between the two will depend on considering the pros and cons of your particular circumstance.