There are a few financing options you have to choose from if you want to buy a car. While you might immediately consider which car loan would be best for you, you may also want to consider a secured or unsecured personal loan. These loans can give you different benefits to a car loan. Find out what they are in this guide.
Personal loans work in a very similar way to car loans to finance a car, with a few notable differences. The same as with a car loan, you apply with a personal lender for the amount you need (this amount can include purposes outside of your car finance, which car loans don't generally allow). A kew difference here is you don't need to supply details of the vehicle, you simply need to tell the lender what you plan to do with the funds.
Once you've received the loan amount you use it to purchase the vehicle yourself along with anything else you needed the loan for. Loan terms can be for between one and seven years and you can generally borrow between $3,000 and $70,000.
What are the benefits of using a personal loan?
While a car loan may be better suited in certain situations, personal loans do offer a range of benefits to those looking to finance a vehicle:
Flexibility with approved funds. The amount you can borrow with a car loan is generally tied to how much the car is. However, a personal loan is not, allowing you to borrow additional funds for insurance, modifications or even to consolidate other debt.
Range of lenders. You may find a larger range of lenders and loan options if you opt for an unsecured personal loan from a bank rather than a car loan.
Buying situations and the financing options to consider
Not sure what type of finance to opt for? Consider the following situations:
Buying a new car from a dealership. Here it may be better to opt for a car loan or dealership finance, unless you want to borrow above the cost of the car. You will be able to get a more competitive rate and may have access to convenient features.
Buying a used car from a private seller. Depending on the age of the vehicle, you may be able to choose between a personal loan or a car loan. Keep in mind the restrictions and the costs of the loan when making your decision.
Personal loans come with a variety of fees and charges that should be considered before you apply:
Interest rate. This rate can either be fixed or variable and can range from 7% p.a. to 20% p.a. depending on the type of loan you opt for and your borrowing situation.
Establishment fees. You may need to pay a fee to set the loan up. This can be called loan establishment fee, loan application fee or loan origination fee, but it will essentially be the same. Once the loan is approved the fee will be added to your borrowing amount.
Ongoing fees. Personal loans may come with monthly or annual fees that will increase your ongoing repayments. Make sure to consider these when comparing your options.
Late payment and default fees. If you make a loan repayment late or fail to make a repayment you will be charged additional fees. These may be daily late fees, direct debit dishonour fees and more. Make sure you get in touch with your lender if you think you'll be late with a repayment to avoid these.
What are the drawbacks of a personal loan?
Choosing a personal loan to finance a car isn't all positive. Here are some of the drawbacks to consider:
Costs. Compared to a car loan, you will generally find personal loans have higher interest rates.
No special car offerings. As car loans are designed for car purchases, lenders offer features such as car-buying services or car insurance add-ons which you can consider. These generally aren't available with personal loans.
How to decide what's right for you
Finding the right financing option comes down to costs, features and flexibility. First, make sure the loan type suits your purchase. Then, consider the features that are available with each loan, do these suit your needs? After this compare the costs of the most suitable loan options and select the most affordably on your budget.
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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