If you need to purchase a different vehicle, you might wonder how you might pay for it. According to Edmunds, the average price of a used car topped $20,000 in the third quarter of 2018. Experian reports that the average price for new cars in the third quarter of 2018 was $31,722. Unless you have socked away that much in your savings, you will most likely have to get a loan to buy a car. You might wonder whether you can use a personal loan to purchase a car. If you can, you might wonder whether it is better for you to buy a car with a personal or automobile loan. Here is everything that you need to know when you are trying to decide which type of loan to use to make your next car purchase.
Can you buy a car with a personal loan?
Most lenders offer personal, unsecured loans to people without restricting what they can spend the money on. This means that you can choose to use the proceeds from this type of loan to buy a car with an unsecured loan instead of a car loan. Getting an unsecured loan can offer you flexibility and convenience since you can decide what you want to purchase with it. For some people, an automobile loan might be preferable. Since automobile loans are secured by cars as collateral, it may be easier for people who have credit problems to qualify for them. They might also be able to pay a lower interest rate for an automobile loan. It is still better to shop around for loans before you head to a car lot, however. Getting multiple loan quotes to purchase an automobile within a short period of time will not have an impact on the credit scores of most people, according to the Fair Isaac Corporation. Instead, the multiple inquiries are counted as a single inquiry, meaning that getting quotes should have little impact on your credit score. If you get preapproved for an automobile loan or are approved for an unsecured loan before you head to the dealership, you will be in a better negotiating position. Having a loan offer in your hand allows you to know what you can afford. The dealer may be likelier to come down in his or her price to try to get your business.
Should I choose a personal or automobile loan for my next car purchase?
When you are trying to decide between a personal or automobile loan for your next car purchase, the factors that you should consider include the following:
- Your credit score
- The interest rate
- Additional fees
- Term of the loan
- Whether collateral is required
- How easy it is to apply and to be approved
- Whether a down payment is required
We will address each of these factors below.
What is your credit score?
Knowing your credit score is important before you apply for any type of loan. If you have a high credit score, you will be much likelier to be approved for either type of loan. A great credit score may also allow you to enjoy low rates of interest and more favorable terms. If your credit score is low, you might have trouble qualifying for a personal, unsecured loan. According to Credit Karma, you may have more trouble getting approved for a personal unsecured loan if your credit score is below 620. You may also have trouble qualifying if you have little or no credit history. However, it is not impossible to get this type of loan with bad credit. Because an automobile loan is secured by the car that you purchase, it might be easier for you to get approved for this type of loan when you have bad credit. This is because the lender can take your car if you fail to pay. However, if you have bad credit and apply for an auto loan, you may face higher costs, higher rates of interest, and higher payments. The lender may also require you to get a cosigner.
What interest rate will you pay?
Auto loans may have lower rates of interest than personal loans, but that is not always the case. The interest rates for personal loans may be higher since the loans are unsecured. Value Penguin reports that the interest rates charged for auto loans vary and depend on your credit score and the length of the loan. While people with excellent credit may be able to get an auto loan at a 4.21% APR, the interest rates can range as high as 24.99% for people with subprime credit. The interest rates for personal loans will also depend on your credit score. Experian reports that the average range of interest rates for personal loans is 6% to 36%, depending on your credit, income, and other factors. You might see advertisements from car dealers for auto loans with very low or no interest charges. To qualify for these loans, you must have excellent credit. You should also be aware that these types of loans typically have short repayment terms of 36 months or less. Unless you can afford the larger payments, you might not want this type of auto loan.
What additional fees might you have to pay?
Whenever you are comparing loans, you should look at the terms. Some auto loans and personal loans charge penalties for repaying the loans early. Personal loans may charge an origination fee. It is possible for you to find personal loans that do not charge an origination fee or a prepayment penalty, but you will need to compare offers. When you compare loans, you should look at the APR for loans that have the same term.
What is the term of the loan?
Personal and automobile loans both have set terms for repayment. The average term of personal loans range from 12 to 60 months, according to The Balance. Value Penguin reports that auto loans may have longer available terms of up to 84 months. However, when you get a longer-term loan, the interest charges may be excessive over the life of the loan. If you take out a longer-term loan, the payments may be lower than a similar loan with the same interest rate but a shorter term. However, you will pay substantially more interest over the life of the loan with a longer term than you would for a shorter-term loan at the same interest rate. It is common for car dealerships to try to get people to only focus on the monthly payments that they will pay instead of on how much the loan will cost. It is important for you to understand that getting a loan that has a lower monthly payment because of the length of its term can mean that you might be paying much more for your loan.
Will collateral be required?
When you get an automobile loan, the car that you purchase will serve as its collateral. If you fail to make your payments as agreed, the lender can repossess your car. Most personal loans are unsecured. If you use an unsecured loan to buy a car, your vehicle will not be repossessed if you are unable to make your payments. If you are worried about your ability to make your payments, however, you might not want to take a loan out in the first place. If that is the situation that you are in, you might want to choose a less expensive car for which you can afford the loan payments. You can also add sources of income or wait to purchase a vehicle.
How easy is it to apply for the loan and to be approved?
You are able to apply for and compare personal loans and auto loans online and to be approved quickly. These online applications also may allow you to get your money as soon as the next day. You can also apply for these types of loans through a credit union or bank. Auto loans are also offered through dealerships.
Will you be required to make a down payment?
Depending on your credit, you may be required to make a down payment for an automobile loan. By contrast, personal loans do not require down payments. If you do not have money for a down payment, an unsecured loan may be a better choice.
Checklist before you apply for a loan
Before you apply for a personal or car loan, you should do the following things:
- Check your credit score;
- Use a loan calculator to determine the interest rates that you might pay;
- If your credit is problematic, take steps to improve it before you apply for a loan;
- Apply for and compare loans;
- Choose a lender that offers you the best terms for your loan;
- Decide whether you want a personal loan or automobile loan for your car;
- Pay attention to the cost of the loan in addition to the monthly payment amounts; and
- Only buy a car that you can afford.
Both personal loans and automobile loans can be used to buy your next car. The terms that you might expect will depend on your credit and the amount that you want to borrow. Do you want to learn more about using personal loans to buy your next vehicle? Leave a comment below.