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Taking out finance in order to purchase a car is a common form of borrowing. The two most applied for types of financing to purchase cars are car loans and personal loans. While similar in some respects, car loans and personal loans are distinctly different forms of finance. So, it is important to work out which one can get you more value for money.
This guide will explain the differences between these two loan types. It also includes a calculator to help you work out exactly how much money you can save by opting for one over the other.
The exact terms of your financing will depend on your chosen lender and product, but you can generally expect to find the following features with each type of loan.
These are dedicated loans designed to cover only the cost of a car and related expenses such as licensing and registration. Most, but not all, are secured loans.
Personal loans are considerably more flexible. You can also shop around to find terms and conditions that may be preferable for you.
Essentially, you could think of car loans as “pre-made packages”, while personal loans are more flexible and can be tailored to your needs.
*What's a balloon payment?
Whether a car loan or a personal loan is better will depend on your personal situation. The pros and cons outlined above will affect different people differently.
For example, a personal loan might be better for you if you:
A car loan might be preferable if you:
If you're wondering what you should ask yourself before you click "submit" on that loan application, we've got a few handy tips that will help.
If you’re anticipating a change in your financial situation in the near future, there’s a good chance a personal loan is preferable for you. An unsecured loan may carry less risk in an uncertain future and if you opt for variable rates, you’ll likely be able to take advantage of additional repayments without penalty.
Pre-approval is generally only available with car loans. This means that if you want to shop for a car knowing how much you have to spend, you may want to opt for a car loan.
Buying used instead of new can be an effective way of saving money, but depending on the vehicle, you might not be able to find a car loan. So, you'll should possibly go for a personal loan instead. For example, some car loans will require the vehicle to be less than two years old, while personal loans will not have any such restrictions.
Bad credit car loans are available, but you’ll find more options with a bad credit personal loan.
It can be costly to make modifications to your vehicle. Whether it’s just a new coat of paint or as extensive as changing the body of the car, many car lenders will not let you add this cost onto your loan. With a personal loan, you can borrow however much you like for different purposes. And you can add the cost of modifications onto the loan amount yourself.
At the end of the day, the most effective way to compare loans is by looking at specific options side by side. It can be a good idea to use a calculator to work out value for money more precisely.
For more information on any of these loans, simply click "More Info" to be taken to our review page. To apply for a loan, click "Go to site".
You might try the following steps to find a loan that works for you. Note that everyone’s circumstances are different and these steps may be considered guidelines. First and foremost, you should always look at the full terms and conditions of each loan you're considering when questioning whether it's right for you. This is because not all car loans are alike, and the terms of personal loans can vary widely.
If you are already certain whether a car loan or personal loan is right for you, then you can only compare those types of financing. If you’re unsure, it can be a good idea to compare both car and personal loans using the steps below.
Remember that you have the freedom to compare options until you've found the right one for you, and that the first option you see might not necessarily be the best one for your circumstances. If you have found a car loan, or a personal loan that you wish to apply for on site, you can simply click "Go to Site" to find out more about how to apply.
Here are some questions we have been asked about car loans and personal loans:
Used car loans may carry higher interest rates to compensate for the reduced value of the vehicle over time, and there will be restrictions on the age of the car.
Car loans are for cars only, while personal loans may be spent at your discretion. Consider the cost of car insurance, licensing and registration, fuel, maintenance, repairs and related costs as well as the price tag of the vehicle itself.
No. It’s standard practice for lenders to ask about the purpose of the personal loan, but no specific vehicle details will need to be supplied unless you apply for a car loan.
Image: Shutterstock
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