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Personal Loan vs. Car Loan: Which Is Best for You?

personal loan vs car loan

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After a long wait of finding the perfect car, the search is finally over! Wondering how you will pay for such a large purchase comes naturally. When faced with this question, you may be asking if a personal loan or a car loan is the best option. Fortunately, this article will help you reach that decision by explaining the differences between loan types, their pros and cons, and which is better according to your needs.

Personal Loan vs. Car Loan: What’s the Difference?

  • Personal Loans

Banks, credit unions, and lending institutions fund borrowers with a personal loan. It is remitted in a lump sum convertible to cash. As its name suggests, borrowers can use this type of loan at their discretion.

Personal loans are often unsecured loans. This means you don’t have to put up any asset as collateral. Instead, lenders consider your credit rating, salary, and existing debt when evaluating your application.

Pros
Cons
  • Flexibility in payment structure
    Why get a personal loan? Its tenure wholly depends on your preferences. You can choose a payment period anywhere from one to five years.
  • No down payment required
    When you take a personal loan for your car, you can pay in cash. Usually, when you pay in cash, you don’t need to make any down payments.
  • Freedom to choose car model and brand
    You can use a personal loan for your individual needs. You may also choose the automobile model and brand based on your budget (from the personal loan proceeds).
  • Higher interest rates
    Personal loans generally have a higher interest compared to car loans. However, the interest still depends on your credit rating and credit score.
  • Strict eligibility requirements
    It’s harder to get approval for a personal loan than a car loan because of the absence of collateral. You might be required to submit many documents and prove your financial capability.
  • Tougher lending requirements
    A personal loan can take longer to apply for than a car loan. It’s heavy on background checks and credit score valuations.
  • Car Loans

Like personal loans, banks, credit unions, and online lenders offer auto loans. What’s the difference? An auto loan is backed by the vehicle you want to purchase. This means the vehicle you’re planning to purchase serves as a pawn to the collateral loan.

Pros Cons
  • Low-interest rates
    While the specific rate you’ll qualify for depends on your financial credentials, the interest rate on a car loan is typically lower than the interest rate on a personal loan.
  • More convenient application process
    Auto loans can be processed irrespective of your credit score. Most vehicle dealerships have salespeople and in-house lending agents to help you with the application procedure.
  • Comes with freebies
    While bargaining with the car dealer, you may acquire freebies like dashboard cams, rain visors, and other automotive accessories.
  • It may require a down payment
    Some car dealers might offer a small down payment (DP). However, most banks require a DP of at least 20% of the vehicle’s cost.
  • Car model and type possibilities are limited
    You may only buy a vehicle within the approved amount of an auto loan you qualify for. Some lenders may also restrict your options to new and minimally-used vehicles.
  • Ownership of car
    Since car loans are secured loans, the lender will transfer the ownership of the vehicle to you only once your tenure is completed.

Personal Loans vs. Car Loans: Choosing What’s Best for You

When is a Personal Loan Better?

  • You’re buying from a private party
    You’ll likely need to pay in cash if you’re buying a car from a private party. The great news is, you can get the funds disbursed to your bank account with a personal loan in as fast as one business day.
  • You’re purchasing a much older car
    Many auto loans are restricted to newer vehicles. If you’re buying an older model, you may not be eligible for a car loan. Similarly, it might be hard to get a car loan if you purchase an inexpensive car with high mileage. However, with a personal loan, how you use it depends on your judgment.
  • You want immediate ownership of the car
    In auto loans, legal tender over a purchased car belongs to the lender until you pay it entirely. Contrary to this, you retain ownership over your assets with personal loans.

When is a Car Loan Better?

  • You need a higher loan amount
    Car loans are secured. In comparison to a personal loan, you can usually qualify for a higher loan amount even with a less-than-stellar credit score.
  • You want a longer repayment term
    Generally, personal loans tend to have shorter repayment terms. By contrast, auto loans can have longer terms. This reduces your monthly payments. But, keep in mind that you might have to pay higher interest fees than you would in a shorter loan term.
  • You’re buying a newer car
    An auto loan can be the best choice if you want to purchase a new car or a used one with less than ten years old and has fewer than 100,000 kilometers. Your application will almost certainly be granted, and the interest rate will be cheaper than a personal loan.

Choose Wisely

Personal and auto loans are your vehicle’s most common financing options. Each loan type bears its pros and cons. Before signing on the dotted line, comparing their pros and cons is crucial. However, your verdict ultimately boils down to your circumstances. For starters, check your credit score, income, and preferred tenure to pay off your vehicle.

Upon deciding on what loan best suits you, the next question is how to get approved for a loan. Fortunately, applying for a loan and funding your car is not precisely tricky with an Asialink Finance auto loan. Asialink Finance is one of the leading finance companies in the Philippines, offering a wide array of convenient and accessible loans with competitive interest rates. Apply now for a loan at Asialink Finance!

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