We live in a world swimming in debt and a world where the things we need are often tantalizingly out of reach. That’s one of the reasons why the loan market has been thriving in recent years, with the sheer amount of lenders available both online and offline representing another.
But if you are considering taking out a loan for a major new purchase (such as a new car) then you’ll need to ascertain which loan will be best for your situation. As long as you meet the requirements, both a personal loan and car loan are simple enough to obtain, with many lenders accepting applications online right there and then due to AI systems that are able t track your credit history in a split second. Car loans are also often approved at the dealership.
But where do you draw the line between the two options and what loan would be most suitable for you? Let’s start by establishing what personal loans and car loans actually are.
Personal Loan
These loans are generally borrowed from a bank in one lump sum so the borrower can use it however they see fit. These loans can be secured against a possession (generally a car or something of equal or greater value) that is seized if the terms of the loan are breached and you can’t pay your loan. For obvious reasons, however, unsecured personal loans are more popular and don’t require any physical collateral. They can be used for any purpose, so represent the more flexible option. No upfront deposit is also generally required.
Car Loan
As the name suggests, car loans can only be used to purchase a car and are always secured against the vehicle itself. This means that if you stop your payments, the car can be seized. These loans are paid in fixed installments and work in a similar manner to a mortgage, so the lender technically owns the car until the payment is complete. They do, however, require an upfront deposit.
Why choose a car loan?
For one thing, unsecured personal loans will generally have much higher interest rates than car loans and are harder to approve. With many car loans, meanwhile you have plenty of financial options despite bad credit. This means that, whatever your credit score, you should be able to apply for a car loan. In terms of the repayment period, car loans are often also a lot longer, starting at 36 months (which is often the maximum for personal loans).
So, simply put, if your credit rating has seen better days and you wish to pay off your car over a longer period, then a car loan is quite comfortably the better option. If, on the other hand, you require a loan for something other than a car, or don’t want to pay an upfront deposit on the vehicle, then a personal loan should give you what you need.
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