Personal Loan vs Auto Loan

Which is better: a personal loan or auto loan?

The answer to this question can vary depending on the situation. Technically, you can purchase a vehicle with either a personal loan or an auto loan. There are advantages and disadvantages to each option that you will need to compare. In some cases, you may only qualify for one option. Once you know what each product offers, you can apply for the one that works best for you.

Can you use a personal loan to buy a car?

You certainly can. Many people use a personal loan vs a car loan when they buy a car. This is often the way you would buy a vehicle from a private seller.

Is a car loan different from a personal loan?

In some ways car loans and personal loans are different, but in some ways they are similar too. For starters, both will fund a fixed amount based on what you borrow. However, when your car loan funds, you'll likely never actually touch the money but rather just drive home in your new car. When a personal loan funds, the lender should release funds directly to you or your bank account.

Another similarity is that both usually have a fixed interest rate for the entire term. This means if you borrow $20,000 at 4.99% for 5 years with a minimum monthly payment of $368, your payment nor interest rate will not change during the loan term. In some cases you may have more leverage negotiating a lower interest rate for an auto loan if you are financing through a dealership.

One of the biggest differences between a car loan vs personal loan is that a car loan uses the vehicle as collateral. This means that if you don't make your payments the lender can repossess your car. A personal loan doesn't usually require collateral although sometimes it can. Because the personal loan is unsecured, the rates for a personal loan vs an auto loan are usually a bit higher. In addition, auto loans may require a down payment on the purchase. With a personal loan you are given the full amount at once and can spend it as you like. In some cases it may be easier to qualify for an auto loan if you have credit challenges. The reason being that the lender has collateral.

While a personal loan is typically unsecured and a lender cannot immediately repossess your vehicle, the consequences of default are severe. It is estimated that a default on a personal loan can result in a 90 to 110-point drop to a consumer's credit score, and the record can stay on your credit report for up to seven years. Furthermore, a lender may be able to sue you for the balance. If they win a judgment, they could potentially place a lien on other assets you own, such as your home, to recoup their losses.

Should I get a personal loan to pay off my car?

You could get a personal loan to pay off your car but it may be hard to justify. Let's say you purchased the vehicle when your credit score was lower than it is now. Therefore, you have a high interest rate on the auto loan. If you are facing a scenario like this, it may make sense to get a personal loan to pay off the car loan. However, it may make more sense to just refinance the existing auto loan.

Whether you decide to use a personal loan or refinance your vehicle, you will need to reapply for a loan. There may be fees involved with the transaction, so you'll want to factor those into your evaluation. In addition, you will want to compare potential savings. If you are considering a personal loan to pay off your car you may be trying to get the monthly payment lowered. However, do not get caught up on just the monthly payment. Pay attention to the cost difference of your options in terms of interest.

Before making a decision, compare your options and do the math. What makes the most sense? If you don't like the idea of your vehicle being held as security, a personal loan would eliminate that problem. You would no longer have a lien on the vehicle.

Will a personal loan affect getting a car loan?

If you already have a personal loan this may affect your ability to get a car loan. Lenders look at a variety of things when they are looking at extending credit. Some factors most lenders consider are income, credit, and debt-to-income ratio. If you have paid your loan on time your credit rating could still be affected because of the outstanding loan balance. Lenders also look at affordability. Having a personal loan will reduce the amount that an auto lender may be able to extend to you. However, if you have plenty of income to cover both payments and a good credit score then a personal loan may not affect your ability to get a car loan.

Are bank loans cheaper than car finance?

Sometimes auto loans offer lower rates and fewer fees than bank loans but this is not always the case. While personal loans don't require down payments, a lot of times auto loans do so that is money out of your pocket.

What is a good reason to get a personal loan?

There are several reasons you may need a personal loan. Whether they are good reasons or not is something you will need to evaluate on a personal level. If the funds from a personal loan can help you fund home improvement projects that can increase your home value, then it may be a good reason. If the funds from a personal loan can help you purchase your son or daughter an inexpensive vehicle so they can get to school or work, then it may be a good reason. If you are using the funds to purchase an expensive designer handbag that may make you happy but won't benefit you financially, then you may want to rethink the necessity of a personal loan.

Also, a personal loan may be better than an auto loan if you are looking to purchase a used car from a family member or close friend and you prefer not to involve the bank or lender in the process. Last, if you are trying to purchase a classic car or a project car that you intend to restore or rebuild, then banks may not want to provide you with the financing you need.

If you areconsidering a personal loan, you can check offers at Acorn Finance with no impact to your credit score.

What type of loan is a car loan?

The most common type of car loan is a traditional car loan. You borrow a certain amount at a fixed rate of interest. You make regular payments and the loan is paid off at the end of the term. The other type is a balloon loan. You will make smaller payments in the first few years of the loan and at the end of the term the balance owing is due. You can take a loan to pay it off, pay it with other sources such as cash, trade the vehicle in or sell it and pay off the outstanding balance.

Another option sometimes found in vehicle financing is a balloon loan. With this structure, you make smaller monthly payments in the first few years of the loan, but a large 'balloon' payment—the remaining balance—is due at the end of the term. Borrowers typically handle this final payment by taking out a new loan to pay it off, paying it in cash, or trading the vehicle in to cover the outstanding balance.

Is it better to finance a car through a bank or dealership?

Banks and dealerships are both good options for financing a vehicle. Dealerships will often approve your application quite quickly. In addition, they may extend loans to people who have imperfect credit scores more readily than a bank. However, with an eager buyer that had laid eyes on the car of their dreams, dealerships often know they have the upperhand. If you can't resist driving your new car home same-day, you should be able to apply for dealership financing with the option to secure alternative financing within 2-3 days. This is often referred to as an option contract. Just be aware that if you are unable to secure better financing with your bank or credit union, you will be committed to the dealership financing if you have already taken the car home.

Is car finance easier to get than a loan?

It can be easier to get car financing compared to a personal loan. Dealerships will often consider people with less than perfect credit because the loan is secured. In addition, car loans can require down payments. So not only does the lender have collateral, but they also have positive equity in the collateral if they require a large enough down payment.

Closing Thoughts

A vehicle is usually the second largest expense people have after their home. In some cases you may need or want to use a personal loan to purchase a vehicle. If you are considering a personal loan for any kind of purchase, you should check offers at Acorn Finance.

Acorn Finance has trustworthy lending partners that can offer APRs as low as 6.99% depending on your credit score. Individuals can discover simple and competitive payment options through Acorn Finance. At Acorn Finance, you can submit one application and receive loan offers in 60 seconds or less with no impact to your credit score. Once you have claimed the best offer and finalized the loan, you can receive funds quickly.

Get pre-qualified for a personal loan with no impact to your credit score. . . check offers now!

See Also

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• Personal Loan to Buy a Car
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• Personal Loan vs. Auto Loan
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• Car Loan Refinancing For Bad Credit
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