If you’re in the market for a new car but don’t have enough cash on hand to buy it upfront, you’re likely thinking of taking out a loan to help finance your purchase. Based on your circumstances, a vehicle loan or a mortgage personal loan could each be an ideal financing option.
Both personal loans and auto loans are considered to be installment loans, meaning you’ll be making fixed monthly payments over a set period of time. Having said that, there are a few major distinctions between the two kinds of loan products that are worth noting.
Below, Colorprodetailrepair explains all there is to know about utilizing a personal loan vs an auto loan to purchase a vehicle, with an examination of how interest rates, eligibility conditions, and loan terms differ between the two.
Personal loans vs. auto loans
The most apparent distinction between personal loans and car loans is that personal loans may be utilized to purchase a home. finance any type of purchase whether it’s for a wedding, house repairs, or a new automobile. Personal loans are also available through lenders, credit unions, and banks. If you so want more flexibility When it comes to the purpose of the money, a personal loan is a suitable option.
Car loans, on the other hand, are exclusively available for the purchase of a vehicle and are often financed via a bank, credit union, or other lender. You may also be able to get a loan through a vehicle dealership, which will usually work with other lenders to give you with one, but this may be a more costly choice. Automobile loans also require a down payment, or a percentage of the value of the loan, and a larger down payment on a loan means having a lower principal to pay off later on.
Another significant distinction is that personal loans are unsecured loans, while vehicle loans are secured loans. In other words, vehicle loans are secured by collateral — in this example, the automobile — but personal loans are not. If you opt to take out an auto loan, a lender may confiscate your vehicle if you fall behind on your payments. If you fail to make payments on a personal loan, your credit score will suffer, and the lender may take legal action, potentially confiscating your possessions, including your automobile.
- Read more: Can I pay off someone else’s car loan?
Since personal loans are mostly unsecured, they require you to have a higher credit score in order to qualify for one. In general, you will need a good credit score , or a score of above 670, to be eligible. Yet, there are certain lenders that would supply personal loans to people with bad credit , albeit the interest rates on these loans will be greater.
If you do have good credit, there are many personal loans available with lower interest rates and no late fees, early payoff penalty fees or origination fees. Choose ranked LightStream Personal Loans , PenFed Personal Loans and Discover Personal Loans as some of the best personal loan lenders .
LightStream Personal Loans
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Annual Percentage Rate (APR)
6.99% – 23.99%* when you sign up for autopay
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Loan purpose
Consolidation of debts, home renovations, vehicle finance, medical costs, wedding, and other expenses
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Loan amounts
$5,000 to $100,000
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Terms
24 to 144 months*
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Credit needed
Good
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Origination fee
None
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Early payoff penalty
None
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Late fee
None
Terms apply.
PenFed Personal Loans
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Annual Percentage Rate (APR)
7.74% to 17.99% APR
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Loan purpose
Debt consolidation, home remodeling, medical expenditures, vehicle loans, and other services are available.
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Loan amounts
$600 to $50,000
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Terms
1 to 5 years
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Credit needed
Good/Excellent
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Origination fee
None
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Early payoff penalty
None
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Late fee
$29
Discover Personal Loans
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Annual Percentage Rate (APR)
5.99% to 24.99%
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Loan purpose
Consolidation of debt, home renovation, wedding, or vacation
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Loan amounts
$2,500 to $35,000
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Terms
36, 48, 60, 72 and 84 months
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Credit needed
Good
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Origination fee
None
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Early payoff penalty
None
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Late fee
$39
Terms apply.
Another thing to consider: Personal loans will typically have repayment terms of one to seven years, while auto loans tend to have repayment periods of two to seven years. If you take on a loan that has a longer repayment term, it might have a lower interest rate but you could end up paying more in total interest than you would with a loan that has a shorter repayment period and a higher interest rate. Use a loan calculator to determine how costly your loan will be.
Both kinds of loans may include an origination fee, which is expressed as a percentage of the loan amount and is paid to the lender in exchange for making the loan. Personal loans tend to have slightly higher origination fees but there are many lenders that offer personal loans without these, such as the three lenders mentioned above.
Generally, it’s advisable to use an auto loan to finance the purchase of a car because these types of loans tend to have lower credit score requirements and offer lower interest rates. as stated by a recent report by the Federal Reserve In May 2022, the average interest rate for a 24-month personal loan was 8.73%, while the average interest rate for a 60-month vehicle loan was 4.85%, indicating a significant difference.
Nonetheless, it’s worthwhile to investigate the conditions of both kinds of loans. Then consider the one with the lowest fees and interest rate, as well as the one with the best repayment period.
Bottom line
Deciding between a personal loan and an auto loan to finance a vehicle boils down to your financial situation. If you want a loan with a lower interest rate but don’t have the finest credit, a car loan is a wonderful option. If, however, you’re looking for a loan you can use for purposes beyond purchasing a car, a personal loan is a good option since you can use that money toward any number of expenses.
Related Questions
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Should I get a car loan and pay it off right away?
The bottom line
Paying off a vehicle loan early may save you money if the lender does not impose an excessive prepayment penalty and you do not have any other high-interest debt. Even a few extra payments can go a long way to reducing your costs. -
Is it better to finance a car or pay in full?
If the interest rate on your savings is lower than the after-tax cost of borrowing, paying cash for your automobile may be the best alternative.
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What is the smartest way to pay off a car loan?
The greatest strategies to pay off your auto loan quicker include refinancing or just making more payments. Even if it’s just a few extra dollars a month, you will reduce your debt and may cut a few months out of your loan.
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Does paying off a car loan early affect credit?
Paying off your auto loan early might have a negative impact on your credit score. When you shut a credit account, your score drops by a few points. Although this is common, if you are on the verge of two categories, deferring payment on your auto loan may be a smart choice if you need to save your credit score for subsequent large purchases.
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Is it smart to get a loan and pay it off right away?
Yes. By paying off your personal loans early you’re bringing an end to monthly payments, which means no more interest charges. Less interest = greater savings.
Makenzie Berke is Interior Repair Manager at ColorProTech. He writes about technology, answer questions about car topics that people want to know
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