The Difference Between Personal and Car Loans

If you’re looking to get a new car, chances are that you’ll have to take out a loan. Two of the most common loans are personal loans and car loans. These loans are relatively easy to obtain, as long as you can meet their lending requirements. Many people get confused between these two types of loans and are not too sure about what exactly the difference is. Personal loans are used for various different reasons such as buying a car or other purchases, while car loans are limited to the purchase of a vehicle. There are pros and cons to each type of loan, so make sure you are clear about them before you decide on which loan to take out the next time.

Car Loans

Car loans are used to finance the purchase of a vehicle and are usually secured against the particular vehicle that you are intending to buy. This means that the car will be collateral for your loan. If you fail to make repayments, the lender can seize the car to cover their losses. The lenders also hold ownership over the car until you repay the debt amount. The money is paid off over a period of time in fixed installments.

Terms and Conditions

Car loans are usually repaid over 36, 48, 60 or 72 months. With shorter repayment terms, you pay more for the monthly repayment. With longer repayment terms, you pay less for the monthly repayment. Credit scores are not so important when taking out a car loan, and it does not have a great impact on the amount you can borrow as well as the interest rate applied. Many lending institutions provide car loans and before signing up, you should look into whether the local bank, credit union or car dealer can give you a better deal for a car loan.

Interest Rates

Car loans are secured loans since the lender has control and ownership of the car until the debt is paid off. Since it is a secured loan, the lending institutions assess it as a lower risk loan and generally offer a lower interest rate. Most interest rates for such loans are fixed and borrowers will not have to deal with the fluctuations that may come with unsecured personal loans.

The Good and the Bad

If you’re looking to take out a car loan to finance the purchase of your next consider, consider some of the pros and cons of this type of loan.

  • Good: Usually, you pay a lower interest rate. It is easier to get approval for the loan if you do not have a great credit history. It can be convenient and fast as it can get approved on the spot for the money.
  • Bad: You do not actually own the car before you pay off your debt in full. You will also need to provide a deposit up front to get the loan.

Personal Loans 

Personal loans allow an individual to borrow funds from a lending institution like a bank, in a lump sum. The money borrowed can be used according to the borrower to finance different things, like purchasing a car, wedding, renovation for their homes, vacation, etc. It is usually secured against something of value to be used as collateral, such as a car or home. If you don’t repay your loan, lenders can then seize these properties and assets to cover their losses. Most people choose to take out an unsecured personal loan, which means that there is no collateral involved.

The Terms

Personal loans typically have to be repaid in a set period of time, such as within 12, 24, 36 months or more. You can choose to take on a longer loan term to pay a lower repayment fee every month, but this also means that you will be paying more interest overall over the duration of the repayment period. On the other hand, you will pay higher monthly repayments with shorter loan terms, but you are also paying less interest overall. An interesting thing to note is that most lenders allow individuals to apply for personal loans online, and allow for car loans to be approved immediately at the car store.

Interest Rate

If you choose to take out a personal loan unsecured, it is likely that you will be faced with higher interest rates compared to a secured loan with attached collateral. Unsecured personal loans usually also come with stricter and tougher requirements for approval, and you will definitely need good credit scores and background to get the approval. If you have poor credit scores, you may not be able to take out a personal loan.

Beyond meeting the requirements, your credit score can also influence the interest rate and the amount of loan taken out. With better credit scores, you will be approved to borrow more and attain a lower interest rate. On the other hand, if you have poor credit scores, you will be faced with low loan amounts and higher interest rates.

The Good and the Bad

Personal loans seem like good ideas to finance your spendings and are more open-ended compared to car loans. But what are some of its pros and cons?

  • Pros: There is flexibility in the payment structure where borrowers can choose to return over a short or long term. Individuals who take out the loan are also allowed to spend the funds at their discretion, not limited to just the purchase of a vehicle.
  • Cons: It is usually accompanied by high-interest rates, with tougher lending requirements and terms. If you have a poor credit score, chances are you won’t qualify and cannot take out a personal loan.

If you’re considering any of the two, it is always good to do your research and look at the various rates and deals offered by the different lending institutions. What’s more, with so many types of loans out there, and all the available auto equity loan information, it is imperative to do sufficient research on your own. When deciding on which loan is better, be sure to take into account what the money is used for and to weigh the pros and cons with your individual circumstances in mind.