Buying a car is a huge purchase and often the second largest one that someone makes behind buying a home. The majority of people do not have the money to pay for a car upfront without it significantly impacting their financial situation which is why most opt to finance the purchase with a loan.
There are two main types to consider – a car loan and a personal loan. Read on to find out the pros and cons of each.
As the name suggests, a car loan is a type of loan which is specifically for buying an automobile. This loan is secured against the vehicle that you intend to buy so if you default on the loan then the lender will seize the automobile.
Monthly payments are made over a pre-agreed period after which it will be yours to own. You benefit from significantly lower interest rates as the debt is deemed lower risk because it is a secured loan that can make this an affordable option. You do not technically own the car until the final payment is made and there may be an upfront deposit to secure the loan. Fortunately, it is possible to get approval even if you do not have a great credit rating largely due to companies like Go Car Credit that offer car loans for those with bad credit scores.
Personal loans, meanwhile, is a type of loan that can be used any way that you wish, such as buying a car, making an emergency household repair or going on holiday. They are typically from an institution like a bank and will see you receive a lump sum and there is flexibility in terms of payment structures.
Personal loans can be secured against an asset like your home or vehicle, so you need to make sure that you are able to make repayments. It is possible to get unsecured personal loans without collateral, but it will be harder to get approval and there will be much higher interest rates. Credit rating will impact the loan amount and interest rate (fixed or variable) so it can be harder for those with a low credit score.
Overall, it will come down to your personal preference and situation, but a car loan is often the best solution if you know that you want to spend the money on an automobile. This is especially true for those that do not have a great credit rating who may struggle to get a personal loan.