Personal loans vs car loans

In short, a car loan is credit that is specifically issued to purchase a vehicle. It is a secured loan that is secured against the car you are purchasing, which means that if you fail to pay your monthly instalments, then the lender can repossess your car.

Car loans are typically structured according to the cost of the vehicle you would like to buy, and a deposit may also apply. Finance providers use the following criteria to design a car loan agreement:

• The cost of the vehicle
• The age of the vehicle
• The information in your credit profile

The lender will determine your interest rates by reviewing your credit report as well as the credit institution’s risk criteria. What may be interesting to note is that car loans generally bare lower interest rates than personal loans. This is because the creditor will simply take your car back if you miss your loan repayments. Once you have paid your loan back in full, then you will have complete ownership of your car.

One drawback of a car loan is that some lenders will only agree to finance newer models. If you have an older vehicle in mind, then a personal loan may be a preferable option.

A personal loan is typically tailored to your needs or to your personal affordability and credit rating. This means that personal loan amounts will vary from person to person and the repayment period can also be customised – although it’s common for most personal loan periods to span from 5-6 years.

The benefit of taking out a personal loan is that it will provide more flexibility. This means that the loan amount you are approved for can be used for anything that you may need. Whether you have your eye on a vintage car, a car that needs remodelling, or a brand-spanking-new model, a personal loan will get you the vehicle you really want.

We know that personal loans and car loans can be used to finance a car. But how do you know which is the best option for you?

Start by asking yourself the following 5 questions:

1. How stable is my financial situation? If there is a chance that you may be earning less in the future (or perhaps you find yourself without an income), then a personal loan is a better choice. This way, your car won’t be repossessed by default if you can’t make your payments.
2. Do you know what car you want to buy? Knowing how much the car you want costs will help you when you apply for pre-approval on a car loan – which, as we learnt, can bare a better interest rate
3. Are you buying a pre-owned vehicle? Purchasing a used car can be a good way to save money. However, not all financial providers will approve a car loan for a used model. In this case, a personal loan may be your only option.
4. Do I have a good credit rating? If your credit rating is bad, then it may be harder to secure a personal loan, even though there are still bad credit car loans available. However, car loans seem to be more accessible in this scenario because your car acts as collateral.
5. Do you want to add extras to your car? Most car finance providers won’t cover the costs of modifying a car or adding extra accessories.  With a personal loan, you can use the funds as you see fit.