Is an Auto Loan or a Personal Loan the Better Option When Financing a New Car?
Shopping for a new car doesn’t necessitate that you have a stockpile of cash on hand to pay for the full cost of the vehicle. Loans are a popular method of financing a new ride. With so many different types of loans available, it can be confusing to pick the right one. Explore the differences between going with an auto loan vs. opting for a personal loan to see which car financing method is best for you.
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Common Ground
The interest rates for both auto and personal loans depends on your credit history. However, auto loans tend to have lower rates than personal loans, so applying for an auto loan should be “plan A” when you’re financing a new car.
Good CreditÂ
Even though auto loans typically offer lower interest rates than personal loans, if you have a solid credit history, there’s a chance you might find a better deal on a personal loan. For example, some lenders provide unemployment protection on a personal loan, which enables you to pause loan repayment in the likelihood that you lose your job.
In most cases, financial experts advise against taking out a personal loan for a car because it’s considered a depreciating asset. A vehicle starts losing value as soon as you drive it off the dealership lot. So, even if you have good credit and shop around for a competent interest rate on a personal loan, you’ll likely find that auto loans are still the cheaper option in the long run.
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Bad CreditÂ
If you have a history of poor credit, you might have to pay a high interest rate whether you choose a personal loan or an auto loan. If you can, it’s wise to delay your vehicle purchase so you can improve your credit and save up for a larger down payment to put toward the car.
If you’re still unable to qualify for an auto loan, taking out a personal loan might be the only financing method available. Personal loans come in one of two varieties: secured or unsecured. A secured personal loan will require you to offer up something you own as a collateral. Unsecured personal loans don’t require a collateral, however, since they’re a riskier venture for the lender, they usually come with significantly higher interest rates.
So, in conclusion, an auto loan should be the first financing route to pursue. Though, depending on your credit history, a personal loan is an alternative path to pursue if that’s the only way you can afford to fund a new vehicle.
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