A new car is not cheap. Unless you have a lot of cash on hand, you may need to choose car finance. A recent report by Experian, one of the three major credit reporting institutions, showed that by the end of 2020, people who bought cars borrowed an average of $35228 in new cars and $22467 in used cars.
With so much money waiting for you, you may want to know which kind of loan is best for you: a car loan or a personal loan? Although you can use any kind of car finance to buy a car, one of them may be a better choice for your situation. We'll tell you everything you need to know to make the right decision.
What is a personal loan?
A personal loan is an unsecured loan with a wide range of uses. Many people apply for personal loans at lower interest rates to consolidate their debts and pay for house maintenance, upgrading, or car maintenance. You can use a personal loan to pay almost all the expenses, including buying a new car.
The interest rate of a personal loan is usually higher than that of an automobile loan because a personal loan is an unsecured loan and secured loan.
Although you usually do not need to pay a down payment, your lender may charge a start-up fee. If so, you can usually ask the lender to deduct it from the loan income, so you need to calculate how much extra money you borrow to pay for it. For example, if you borrow $12000, plus a $500 founding fee, you'll get $11500.
Personal loan qualification requirements
When you apply for a personal loan, the lending institution will consider several factors, each of which sets its own specific qualification requirements. Generally speaking, you usually need a good credit score (670 or above) to qualify. The lender will also check your income to make sure you can pay the loan. If you are self-employed, you may need to provide a two-year tax return to prove that you have a stable income history.
What is a car loan?
On the other hand, a car loan is a secured loan that uses your car as collateral. This means that if you default on your repayment or loan, the lender can take back your car to make up for its loss.
Because lenders promise to be repaid in some way, they have less risk of lending you money. Because the risk is less, they will transfer these savings to you in the form of a low interest rate, which can save you a lot of money during the term of your loan.
Qualification requirements for an auto loan
Like personal loans, each auto loan institution has its own qualification requirements. Since car loans are secured, it is usually easier to qualify for loans, especially if your credit is not the best. Although we recommend getting at least 670 points to get the most favorable conditions, you may be eligible for a lower score auto loan according to your debt to income ratio (DTI) and down payment amount.
In addition, obtaining auto loans may be more difficult in some ways, because most lending institutions are only willing to lend according to a specific model year or model. For example, if you are financing an old car or a house in need of repair, finding a car loan can be challenging. However, if you are looking for a new, commuter car, a loan institution will likely lend you money to buy a car you can afford.
Advantages and disadvantages of using a personal loan and automobile loan
Benefits of buying a car with a personal loan
No down payment: the biggest reason for choosing a personal loan to buy a car is that you don't need a down payment.
Reduce the risk of recovery: if you default on your loan, your lender will not recover your car (at least not immediately - they can still pursue you in court).
Less restrictive: you can use a personal loan to buy any car you want, as long as you can afford the loan.
Disadvantages of buying a car with a personal loan
More expensive: the interest rate on personal loans is higher than that on car loans. According to the latest average interest rate of the Federal Reserve, the interest rate of two-year personal loans is almost twice that of four-year auto loans (9.65% vs. 4.95%).
Benefits of buying a car with a car loan
More affordable: car loans are cheaper. If you use the above interest rate to borrow $25000 for five years, you can pay $56 less for the car loan every month, and you can save $3340 in interest when you return the car.
Easier access: Generally speaking, you don't need a good credit score to get a car loan, although it does help.
Disadvantages of buying a car with a car loan
It may not be possible to borrow for all cars: lending institutions set a critical point for the service life of cars. It usually must also be in working condition. If you want to repair an old car, the car loan may not work.
Down payment required: most lenders will require a certain level of down payment. If you don't have a down payment, it may be difficult to apply for a car loan.