Personal Loans vs Car Loans
If you haven’t taken out a loan before it can feel like there’s a lot to learn about the different types of loans. Don’t worry though – it’s fairly easy to understand the different types of loans and how they can suit specific needs that you might have.
When you’re considering making a large purchase such as a car, the majority of people will need to take out a loan – rather than paying for it upfront. Very few people have the funds available to simply make the purchase themselves so loans can give you a huge amount of freedom when it comes to getting items and assets you could otherwise only dream of!
If you’re thinking of buying a car and you need a loan, the two main options you’re likely to choose from will be:
- Personal loan
- Car loan
It’s fairly easy to tell from the term ‘car loan’ what this financing option relates to. It’s a loan that’s given by a lender in order to purchase a vehicle.
Flexibility with different types of loans
Depending on your specific needs, you may be keen to get a loan, which you can spend exactly how you want to, or you may be happy with a loan that is given to you with the criteria stating how the money should be used.
- Car loans: the funds given by the lender must be spent on buying a car.
- Personal loans: the money you’ll obtain from the loan can be used for a number of different things – from covering costs such as a wedding or honeymoon to buying a car.
Personal loans and car loans are simply different types of loans and the right option for you will depend on a variety of factors including your specific personal and financial circumstances.
Security with different types of loans
One of the big differences between car loans and personal loans is that car loans are usually secured and personal loans are often unsecured.
- Car loans: generally car loans are secured against the vehicle that you want to purchase. This means that the vehicle serves as collateral for the loan. This means that if you default on the loan or miss payments, the lender may be able to take back the car.It is possible to get unsecured car loans but they aren’t as common and they often have very high rates of interest on them as the lender is more at risk of losing money.
- Personal loans: whereas you can secure a personal loan against a current valuable asset that you have, it’s more common for this type of loan to be unsecured.
Rate of interest with different types of loans
One of the most important things to consider when it comes to comparing different types of loans is the rate of interest that you’ll have on the loan. This can make a huge difference to the total repayments you’ll be expected to pay back each month so it’ll be important to consider when you’re budgeting prior to signing any loan agreement.
- Car loans: generally car loans have a fixed rate of interest. This is useful if you have a strict budget and want to know in advance exactly how much money will be coming out of your bank account each month to pay back the loan. With a fixed rate, you can budget in the knowledge that the amount will be the same for the entire loan term.Due to the fixed rate of interest, some people dislike the lack of flexibility with a car loan and this option may not suit someone who may suddenly be able to pay off larger amounts or want to change their monthly repayments. In this case, it is possible to get variable rates of interest on a car loan.
- Personal loans: with personal loans you’ll generally have a wider variety of options to choose from when it comes to fixed or variable rates of interest. Many people like the fact that you can tailor a personal loan to suit your needs, figuring out how you want your repayments to work.
Overcoming bad credit to get personal loans and car loans
If you have bad credit you might be worried about whether you’re able to get personal loans and car loans. Don’t worry, your credit score might make it harder to get a loan approved but it’s certainly not impossible.
One of the most important things you can do when looking at different types of loans with bad credit is to find a trusted lender who specialises in working with people with bad credit. This can save you huge amounts of time, money and stress and can help you to avoid making multiple loan applications, which could be rejected.
Having bad credit can often mean that you’re faced with higher interest rates for different types of loans than people with a good credit score. This is because you are seen as higher risk by the lender so are likely to end up paying slightly more in terms of your monthly repayments on loans.
Figure out what you want
Having a bit of background knowledge about different types of loans can really help you to find the right loan for you.
Think about some of the following questions and you’ll be well in the best position possible to start searching for the right loan for you:
- What do you want to buy with your loan?
- Do you want a fixed or variable rate of interest?
- Do you want a secured or unsecured loan?
- How long do you want the loan term to be?
- What can you realistically afford to pay back each month?
- What is your current credit rating and can you do anything to improve it?
- If you have bad credit, can you delay your loan application until it has improved?
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