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.
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:
- No restrictions on how you spend the funds.
- The payment structure is flexible (Short or Long term).
- 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.