Using Personal Loan to Purchase New Vehicle

Two of the most common loans that people apply for are personal and car loan. Both of these loans are easy to obtain if you are able to meet the respective requirements. Nowadays, most lenders accept online applications for personal loans and car dealership generally approves on the spot car loans. The difference between these two is personal loan can be used for different purposes like vacation trip, home renovation, or family gatherings while car loan is strictly for purchasing a vehicle.

For people who want to purchase a new vehicle, they opt to go with a car loan because it is usually quick and readily available in car dealers. However, there are some cases that personal loan is more beneficial to get instead of a car loan. Note that each loan type has its own pros and cons. Thus, it is important to evaluate and compare them before choosing one.

Personal Loan

A personal loan is where the borrower takes money from a lending institution, such as a bank. The full amount is paid in a lump sum that can be used at the borrower’s preference. The amount of personal loan typically ranges from $1,000 up to $50,000.

A personal loan can be secured or unsecured. Secured personal loan means that you have to make some of your valuable assets to be used as collateral; it can be your house, another vehicle, or other property. In the event that you were not able to pay, the lender can seize your asset to recover its losses. On the other hand, an unsecured personal loan is the most preferred loan by most people since it is free from collateral. However, it usually incurs higher interest rates because the lender has no ‘security’ in case you default on your payments. Moreover, an unsecured personal loan has much more rigid approval requirements which include checking of the credit scores of borrowers. Note that the loan amount and the interest rate will be largely influenced by your credit rating. The better your credit rating, then you will have higher borrowing capacity with lower interest rate. Conversely, people with poor credit rating can only borrow small amount with a high-interest rate. Thus, you need to have an excellent credit score if you want an unsecured personal loan.


The term of repayment for a personal loan is set in months, which can be 12, 24, or 36 months. Longer loan terms will lower the monthly repayment but has more interest. Conversely, shorter loan terms will mean higher monthly repayments but lesser overall interest.

To sum up unsecured personal loans:

  • Pros:
    • No restrictions on how you spend the funds.
    • The payment structure is flexible (Short or Long term).
  • Cons
    • It usually has higher interest rates.
    • More strict lending requirements in the application process.
    • Clients with poor credit scores are not qualified for an unsecured personal loan.

In the end, it is up to you if you will apply for a personal loan or a car loan to obtain a car. You can ask yourself the following questions so that you can evaluate which loan will be better for you:

  • Do I have valuable assets that can be used as collateral to secure a loan?
  • What interest rate and repayment structure can I honestly afford?
  • Is my credit score in good status?

The next step is doing some research and look for the best deal. Look at different banks, credit unions, and other lending platforms and ask about their rates and offered deals. And then, you will find the best combination of interest rates and terms for repayment for an affordable monthly payment.


What is Car Loan?

Nowadays, getting the car that you want is easier because several lending institutions are offering loans and flexible repayment structures for everyone. Unlike in the past, you have to pay first for the car’s full amount to obtain it.

A car loan is one of the most common types of loans. It is a secured loan, which means the vehicle that you will purchase will serve as collateral. So, if you default on your payments then the lender can seize and take ownership of your car. The car loan is paid off in fixed installments over the period of repayment. It is almost the same as a mortgage loan, where the lender retains ownership of the asset until the final payment is made.

Since car loan is a secured one, which means the lender has financial control over the car, the debt is considered to have a lower risk. Thus, a car loan is offered with a significantly reduced interest rate to the borrowers. Unlike with unsecured personal loans, interest rates are fixed and not subjected to increases.

Most car loans have a fixed repayment terms at 36, 48, or 60 months. If you choose a short repayment term, then you will have higher monthly repayment and lesser interest rate. Conversely, longer-term have lower monthly repayment fee and higher interest rate.

Credit score doesn’t have a large impact on a car loan, unlike with personal loan. If you have a less-than-average credit history, you can still apply for a car loan and have a high chance of loan approval. Moreover, it will have less impact on your interest rate or borrowing amount because it is dictated by the price of the car.

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Before you sign up for any car loan from a car dealer, you should check first whether a local bank or credit union will give you a better deal. It will be discussed in the next article, ‘Using Personal Loan to Purchase New Vehicle’.

To give a clear summary of car loan:

  • Pros:
    • Usually has a lower interest rate.
    • Easier to get car loan approval even if you have a mediocre credit history.
    • It is convenient ‘on the spot’ finance solution because it is quick and readily available in car dealers.
  • Cons:
    • You won’t have the title of the car until the final repayment is made.
    • To secure a car loan, an upfront deposit is generally required.

Introduction to Personal Loan

In some point of our life, we might find ourselves into some trouble regarding money. It could be due to hospital bills, school fees of your children, or for household use like repairs or purchasing equipment. Good thing is that you can get a loan through banks or companies that offer bonds.

A personal loan is one of the many types of loans that you can borrow from a bank. The purpose of this loan is for general use or depending on the discretion of the borrower. It can be used to finance a car or other vehicles, renovations to your home, consolidation of debt, to finance a vacation of one kind or another, and a great number of other things. In terms of consolidating a number of other loans into one, a personal loan is available for this. This type of loan is called as debt consolidation loan.


A personal loan is a smaller loan and has shorter term compared to a mortgage. Unlike with mortgage loan that takes ten, twenty, perhaps thirty years to pay, a personal loan is usually between one and five years. It can either be unsecured or secured by assigning some of your assets as collateral or by having a co-signor or guarantor. Note that personal loans are often more difficult to get and have strict qualification requirements.

Before you apply for a personal loan, you need to know everything about it and be careful. You have to make sure that:

  • There are no hidden costs.
  • You fully understand what you are doing.
  • You are fully informed of the consequences of the steps you are taking.
  • The solution you choose will gain you a real benefit and not just a short-term remedy for your situation.
  • You will be able to have control over your debts.
  • The personal loan will help you to have less debt to settle and not increase it.

Car Finance

Getting a car is not that simple. It can be quite expensive due to its pricey amount plus the cost of gas to make it run, and the money you have to spend for its maintenance. In order to sell more cars, the marketing industry formulated a plan to encourage people to buy cars. Car companies are offering different financial products that will allow people to get a car with any arrangement other than a single lump payment, which is known as car finance. Different types of car finance are possible due to the high residual value of cars and the second-hand car market, which enables other forms of financing beyond pure unsecured loans.


Through provisions of car finance, the acquirer can provide for and raise the funds to compensate the initial owner, either a dealer or manufacturer. Third party supplier offers car finance to private individuals and businesses. All types of finance products are available to both sectors. The only difference is the market share by finance type due to the business contract hire that can provide tax and cash flow benefits to businesses.

There are two major types of car finance: it can be personal or through lenders.

  • Personal car finance is a complete subsector of personal finance, which includes straightforward car loan, hire purchase, personal contract hire or car leasing, and Personal Contract Purchase. Thus, car finance is not limited to vehicle leasing. Retail bank or specialist car financing company provides funding for personal car finance. Some car manufacturers now also have their own car financing arms. Indirect auto lenders may set risk-based interest rate or ‘buy rate’ communicated to auto dealers. Car companies may then allow their auto dealers to charge a higher interest rate when they closed a deal with the consumer. This is called ‘dealer markup’, which can generate compensations for dealers. Dealers then can charge consumers with different rates regardless of their credit scores.
  • The second type of car finance is through lenders. The common clients of these major leasing companies are private individuals. They let their clients borrow money to buy cars, or rent the car until they were able to pay for its price. These companies not only offer brand new cars but second-hand cars as well. In the US, the Federal Trade Commission is responsible for protecting the rights of consumers in this market. The Consumer Financial Protection bureau helps people about their auto loan questions and accommodates their complaints. In the UK, the Financial Conduct Authority is the one responsible for regulating and licensing companies who sell, advice, or promote financial products. While the Finance and Leasing Association guides the people regarding car finance, together with an asset, consumer, and motor industry. The FLA has a website which explains all aspects of car finance for private individuals in the UK.

Based on the 2015 ranking of Auto News in Auto Finance Performance, the global auto-finance industry leaders are Toyota Financial Services, Bank of America, Security Service FCU, BMO Harris Bank, and SunTrust Bank. The criteria for the ranking were determined by the assessment of financing service, pricing, the number of representatives, and product placement.


What is Loan?

Before we discuss vehicle or auto loans, let’s start first with understanding loans in general. Loan means lending of money from one individual, organization or entity to another individual, organization or entity. The borrower initially receives or borrows an amount of money, called the principal, from the lender and is obligated to pay back an equal amount of money to the lender at a later time. Besides the amount of loan, there is another cost that should also be paid: the interest, which provides an incentive for the lender to engage in the loan. In an unofficial loan, the borrower will have to give a promissory note to the lender. It will state the principal amount of the borrowed money, the interest rate the lender is charging, and the date of settlement. On the other hand, legal loan involves a contract that states the obligations and restrictions regarding the loan, lender, and borrower. Financial institutions, such as banks and credit card companies, have the principal task of providing loans.

There are different types of loans depending on the arrangement of the lender and the borrower:

  1. Secured – this type of loan is where the borrower pledges his/her assets to the lender as collateral. Some of the assets used as collateral are houses, cars, and properties. car-garge-house-lg
  2. Unsecured – monetary loans that are not secured against the borrower’s assets. These may or may not be regulated by law, and usually have higher interest rates than secured loans. It can be under different forms or marketing packages like:
    • Credit card debt
    • Personal loans
    • Bank overdrafts
    • Credit facilities or lines of credits
    • Corporate bonds
    • Peer-to-peer lending
  3. Demand – these are short term loans that may be secured or unsecured. These loans do not have fixed dates for settlement and carry floating interest rate depending on the prime lending rate.
  4. Subsidized – the interest in this loan is reduced by an explicit or hidden subsidy. One example is college loans in the United States. The loan will not accumulate any interest while a student remains enrolled in school.
  5. Concessional – also known as ‘soft loan’ because it is more generous than market loans. They offer below-market interest rates or long grace periods, or both. The common loans, in this case, are provided by foreign governments to developing countries or loans that are offered to employees of lending institutions as an employee benefit.