If you’re in the market for a new car, you might be considering your finance options. Most car buyers take out a loan and make monthly payments in order to make the purchase more affordable. But what kind of loan is best for a new car? Auto loans and personal loans can both benefit you during your purchase, but your choice depends on your financial situation.
Auto loans are most popular for vehicle purchases because they are easier to secure. Lenders use the car as collateral, so if you don’t repay the loan, they will take back your car. Personal loans, on the other hand, can be for a variety of expenses and may not always require collateral, making them more difficult to get.
Auto loans are not the only finance options out there. Many buyers choose personal loans when it’s time to make a major purchase, such as a vehicle. Thousands of banks, credit unions and other financial institutions offer personal loans for vehicle purchases in addition to other major expenses, like vacations, weddings and other things.
Like other types of loans, personal loans require a payment of interest. Banks offer lower interest rates to those who can put up collateral, which is anything of value that the bank can take in the event you don’t repay your loan. Collateral can be things like your home, a vacation home or the vehicle itself.
When you take out a personal loan using collateral, it is known as a secured loan. The bank places a lien on the car and is listed as the owner on the car’s title. Once you pay off the loan, you become the owner of the vehicle and your name will be listed on the title instead.
If you don’t put up collateral, the loan is referred to as an unsecured loan. These types of loans tend to carry higher interest rates, since the lender is taking more of a risk by lending you the money without being able to seize anything of value if you stop making your payments.
Using an unsecured personal loan to buy a car means that you will be listed on the title, not the lender. This allows you to sell your car, even before you pay off the loan.
If you want more flexibility when it comes to using your borrowed funds and do not want to make a down payment on the purchase of a car, a personal loan might be best. However, be prepared for higher interest rates and a stricter approval process. Most lenders require you to meet minimum credit requirements in order to get approved for a personal loan, especially one that covers the cost of a new vehicle.