Consider your credit record and payment flexibility needs before choosing the right loan.
Are you in the market for a new car? Or, do you need some extra cash for something else like a wedding or to finance a home renovation project?
Perhaps you need both, which is where car and personal loans come in. Although both types of loans can be a lifesaver, it’s worth understanding them fully before deciding which best suits your needs.
Some of the main reasons that people apply for personal loans are:
• Pay off a credit card
• Consolidate debt (combine other loans, such as credit cards and car loans, into a single loan)
• Financing funeral expenses
• Paying medical bills
• Buying a car or other type of vehicle
• Renovating their home
• Paying for a wedding
• Paying for medical procedures: Some conditions apply
• Taking a well earned holiday
Personal loans can be used to pay for almost anything of value, or for any reasonable purpose. Personal loans come in two forms, secured or unsecured. A secured personal loan is secured against your car, home, or something else of value – this option of course provides peace of mind to the lender that if you can no longer pay your loan they are able to repossess the security to offset the loan debt. Any remaining loan balance will still be the borrower’s responsibility. However, many people prefer the collateral-free, unsecured option, but this does often mean a higher interest rate on the loan due to the higher risk the lender is taking – there is no secured property against the loan.
The Secured Car Loan
When you purchase a new or used vehicle with a secured loan, the loan is secured against the vehicle serving as collateral, which mean if you can no longer pay off the loan the lender will repossess your car to offset the loan debt. Again, any remaining balance will still be the responsibility of the borrower. Similarly to a mortgage, you will only attain ownership of the vehicle once the final payment is made. The advantage of this loan type is potentially lower interest rates because the lender is at a reduced risk.
Added to this, car loans can offer fixed interest rates which means that your repayment amounts won’t change over the life of the loan. This is an advantage when it comes to planning your budget, but can be a disadvantage if you’re looking for payment flexibility. Also, if you default on a secured car loan for any reason, the lender would be within their rights to repossess the car to satisfy or reduce the outstanding debt, which is why your financial situation employment situation and credit history will be closely analysed before the loan is granted.
View our Car Buyer Guide here.
What to choose: Personal or Car Loan?
Of course, if you require a loan for something other than a vehicle, you’ll need to go the personal loan route. However, a poor credit score could see you at a disadvantage when applying for this loan type.
Whatever the case, it is important to not merely succumb to the default option, but to compare your ability to make repayments with the various interest rates, payment restrictions, and terms and conditions that will differ from loan to loan.
Every loan type offers pros and cons, and it is worth your while to speak to an experienced loan consultant to determine which one will be the best suit your needs and financial situation.