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Personal Loan Vs Car Loan: Whats The Difference?

Personal Loan Vs Car Loan: Whats The Difference?

Personal Loan Vs Car Loan: Whats The Difference?

personal loan vs car loan

It’s important for an individual to distinguish between a personal loan and a car loan. We share how to tell the difference between a personal loan vs car loan.

Keyword(s): personal loan vs car loan

An average new car in America will set you back $32,000. This amount is too steep for many to pay for in cash.

For most people, taking a car or a personal loan is the most viable option but which should you go for between the two?

To answer that question, it’s important to understand what each of these options entail. In this article, we shall make an analysis of personal loan vs. car loan to help you make the right choice.

Personal Loans

A personal loan is an unsecured facility that provides the borrower with funds from the lending institution. The institution is most often a bank.

The funds are advanced in a lump sum, and the borrower can channel their loan funds towards any venture they see fit. These loans typically range from $1,000 to $ 50,000.

A personal loan can also be secured, meaning you attach an asset of value to your loan. On default or inability to repay your loan, the lending institution can seize the property to recoup their funds.

However, most borrowers opt for the unsecured loan.

Interest Rate

Because of the risk involved, unsecured loans attract higher interest rates than secured ones.

Their requirements are also more stringent, with the borrower’s ability to repay and previous credit history being scrutinized.

It does not end there, the amount you qualify for, and the interest rate at which a lender advances your loan are both dependent on your credit rating.

Even though there are things you can do to improve your credit rating, you will have to contend with high interest rates if your rating is less than stellar.

Loan Term

Personal loans have a repayment period attached. The longer the repayment period, the higher the interest you will pay by the time the loan comes to term.

The reverse is also true; you pay less interest with shorter loan terms. However, you should go for these only when you are absolutely confident that you can comfortably pay the higher amounts.

Car Loan

These loans are considered a secured loan.

The security, in this case, is the car you intend to buy. If you default on your payments, the dealer repossesses the vehicle to recoup his money.

The borrower makes fixed payments over the duration of the loan. As the borrower, you take physical ownership of the vehicle, but the financier owns the asset until you make your final payment.

Interest Rate

Because the car you buy is also collateral for your loan, a car loan is deemed to be low-risk financing.

It, therefore, attracts lower interest as compared to a personal unsecured loan.
The interest rate is also fixed from the onset, cushioning borrowers from increases experienced with personal loans.

Loan Term

Most car repayment terms are under 36, 48, or 60 months. Again, the monthly payments are higher for shorter repayment terms and lower with longer repayment terms.

Conversely, the interest paid is higher for more extended repayment periods than for shorter ones.

Unlike a personal loan where your credit history features prominently, your credit rating does not significantly affect your car loan application.

Similarly, an unfavorable credit rating does not significantly impact your borrowing amount nor interest rate.

This means you can still go for a pricey car with a poor credit rating.

Personal Loan vs. Car Loan: Pros and Cons at a Glance

As already discussed, these loans have their similarities and differences. They also have their advantages and disadvantages.

Personal Loan

The merits or personal loans are two-fold.

The first is that you can use your personal loan for a car, or channel it to other uses, partially or wholly. As such, a personal loan also offers more flexibility in repayments.

Personal loans do have a downside, however.

Due to their unsecured nature, personal loans employ stricter eligibility criteria and requirements. Upon qualification, you also pay higher interest rates.
Personal loans also lock out people with poor credit scores.

Car Loan

Car loan applicants enjoy lower interest rates, with faster approval processes. If you need a car and have a poor credit history, a car loan might be the only financing option available to you.

This notwithstanding, you need to put up a deposit to get a car loan. The amount will be dictated by the total cost of the car. This can be limiting.

In addition to this, you do not fully own the car until you have made your last payment.

Tips for Shopping for Financing for a Car

Whether you go for a personal or a car loan, there are tips to help you find a good financing option.

1. Determine How Much You Can Spend

Determine how much you can afford to spend. A rule of thumb is that you should be able to repay the loan within three years.

This cuts down the amount of interest and prevents you from paying more than the real value of the car.

2. Make Loan Comparisons

Contact your local banks and credit unions to see if you can be pre-approved for a loan, and what the interest rates are.

Compare bank rates with dealership rates, and do your research on any discounts that can be offered to you.

Find out if setting up automatic loan repayments or switching banks will lower your interest rate as well.

All this information will point you towards the most affordable option.

3. Have Your Financial Information Ready

The pre-approval process may include producing proof of income documents.

Be ready with this information, as well as any other financial information that can help your loan be approved and disbursed faster.

4. Start Shopping Around

When you reach advanced stages of loan approval, you can get to the fun part, which is shopping for and test driving different cars.

A personal loan offers more leverage in terms of bargaining power on your car of choice.

Do not shy away from negotiating with a dealer either. Shop around and find out the going rate for the car you want.

If you have an older car, it might seem easier to trade it in. While this is one way to go about it, selling your old car independently will give you a better return than trading it in.

Which Should You Go For?

The key take away on the personal loan vs. car loan question is to understand the differences and measure either type of loan against your circumstances to find the best fit.

First Financial is a leading financial solution provider to people with a poor credit score. Contact us today if you are in need of a personal or a car loan.

Know the 4 Most Common Auto Loan Mistakes Before you Go to the Dealer

cash and car for auto loan
Be aware of auto loan pitfalls and save! 

 

Want to hear something scary? “The big mistakes are made in the financing office,” explains Phil Reed, senior consumer advice editor at Edmunds.com, the auto research website. “Making the right decisions can save thousands over the life of the loan.”

A car is a big purchase with a lot of moving parts. Dealers makes their profits between the gaps in buyer’s knowledge and they may try to confuse by unleashing lots of terms like “negative equity” and “origination fees.” Use these recommendations from experts to save thousands over the life of your car loan.

Don’t let the dealer define your credit score or credit “worthiness.”

Walk into the showroom with your credit report snugly in your back pocket. Otherwise, you run the risk that the salesperson leaves your negotiation only to come back with bad news about your credit. And of course that score isn’t high enough to get you the best rates. Who knows if he or she was checking your scores or playing a quick game of hacky sack? Dealers know that most consumers do not check their credit before being lured in by deals. Don’t make yourself vulnerable to this unethical treatment.

We discuss how to find your credit score easily in our previous blog post on rebuilding your credit (LINK). Just go to Annualcreditreport.com, fill out a few fields and your report arrives in you inbox instantly. Trust these results from the only free site authorized by the U.S. government’s Federal Trade Commission. Typically, anyone with a credit score of 720 or higher gets the lowest interest rates as they’ve demonstrated the most responsible money management. Still high 600s to low 700s is considered a “good” score. Those with lower scores can still get loans, but they will pay more in interest and fees.

Another way to check your credit is to get pre-approved from an outside lender like your bank or by applying for an online auto loan.  If you can manage to shave just 1 percent from your car loan, you’ll pay hundreds less over the next five or six years.  

Don’t make the wrong choice between a loan interest rate and a cash rebate.

Sure, the cash rebate feels enticing. And it might be the right choice if you use it to pay off other, higher interest loans like cash advances or credit cards. Basically, you need to decide if you want a lump sum up front or lower monthly payments over the next five or six years. Of course, not every car buyer is offered low-interest car financing, only those with the best credit scores. Again, know your score before you go to the dealership.

Don’t roll negative equity forward.

Some like to get new cars every two years. Often, they walk into the dealership with their auto loan “upside down.” That means they still owe more on the car than it’s worth. While those loving shiny new cars can get their next ride even if their loan is upside down, they’re putting themselves on a downward financial spiral.

Dealers don’t care what financial shape the car buyer puts themselves in. They will just add the negative equity–what you owe–into the purchase price of the new car. Chances are, this frequent buyer will just roll even more negative equity into the next new car, too.

Rather than enter this vicious cycle, consider buying a used car. A car loses much of its value in the first two years off the lot. And today, most cars are built to last 250,000 miles. Consider keeping the car longer and buying used to get the most for your car budget.

Don’t finance costly add-ons.

Just as movie theaters make most of their money on the popcorn, 37% of auto dealer’s profits come through aftermarket add-ons. These add-ons include  extended warranties, fabric protection and paint sealant and they are always less expensive from vendors other than the dealer. These costs feel like a no brainer when amortized over the life of the loan. The salesperson is quick to tell you that they add just a few dollars to every payment. Still, even $20 more over 60 payments is an additional $1200–real money.  

Don’t hesitate to question all fees.

With the deal wrapping up, a buyer’s guard is down. Salespeople know this well. The deal takes so long for a reason. It’s at the end that a salesperson may bring up unusual fees that may have official sounding names. Review all of the legitimate fees here and don’t hesitate to push the salesperson to drop anything that sounds suspicious.

A+ Rated First Financial Approves Auto Loans Up to $45,000

Better Business Bureau A+ rated First Financial has helped arrange over 1,000,000 auto loans, some with approved amounts of up to $45,000. We have loans for borrowers with all credit scores, even fair poor and bad credit. Take three minutes to apply here for a new or used car loan and get your answer fast!

 

Know these 2019 Auto Loan Trends Before You Buy a Car

aston martin with a good auto loan

There are some pretty sweet 2019 automobiles hitting the markets right now.

Acura redesigned their luxury compact RDX. Subaru is doing it’s Outback one better with its the 3-row Ascent SUV. Pickup trucks have been re-tooled as well. The compact Ford Ranger gets a sporty new design, and Chevy has modernized its powerful Silverado.

And then there are the high-tech features!

Internet connectivity, which sounded space-age just a few years ago now comes standard on many models. Apple CarPlay and Android Auto puts a range of entertainment and navigation options at drivers’ fingertips.

But before you let these new models and technological advances bewitch you, understand the trends in 2019 auto loans so you can get a deal.

Trend:  Slowing car sales

Why?:  Millennials and urban dwellers are avoiding buying cars because they find Uber and public transportation sufficient. Millennials also put less focus on material possessions reflect status. They are not enthusiastic buyers of cars OR homes.

For You:Car manufacturers and dealers will offer more incentives. Car prices will stay steady from 2018 to 2019.

Trend:  Lower loan origination fees

Why?:  Cloud processing, automated application review, and digitized documents mean dedicated, in-house loan analysts now have to get jobs at Subway. It also means lower labor costs for lenders.

For You: In the competitive auto loan market, lenders have to compete on price. Therefore, the buyer has more power to negotiate the 1% to 2% loan origination fee.

Trend:  Eight-year car loans

Why?:  Cars are lasting longer. Toyotas and Hyundais tend to get the most praise for working well after 200,000 miles.  According to autobytel.com, however, American models like the Chevy Impala and Buick LaCrosse hold up well into the 200,000 mile range as well. “Every new car today is built to last a quarter of a million miles,” explains Mike Calkins, AAA technical services manager. Taxi drivers brag that their Priuses make it to 600,000 miles!

For You: Car buyers who like to keep their cars for a long time can get more car for their budget with an 8-year car loan. While they’ll be in for more interest payments, using that money in other better-performing investments offsets auto loan interest costs.

Trend:  Rising interest rates

Why?:  With the economy thriving, the federal reserve has raised the federal funds rate eight times since the end of the Great Recession. It’s now at 2.25%. Most economist predict “The Fed” will bump rates up three more times in 2019 and then at least once more in 2020. With a federal funds rate at 3.25%, you bet the average auto loan cost will rise.

For You:   The tricky thing is, as happens with homes, when auto loan interest rates rise, car manufacturers tend to compensate with lower prices. They know about how much their consumers can spend each month on a car payment. Still, when you go into the dealership, don’t be surprised that the 1% interest rates have disappeared.

A+ Rated First Financial Cuts Auto Loan Costs to the Bone

Are you in the market for a new or pre-owned car? Better Business Bureau, A+ rated First Financial has auto loans for all credit types, even bad credit! Since 1996, we’ve helped arrange over 1,000,000 auto loans, some with approved amounts of up to $45,000. Take three minutes to apply here for a new or used car loan at the lowest rates!

Buying a Car when 72- and 84-Month Auto Loans Are the New Normal

Happy embracing couple planning their home kitchen furnishing renovation. Sketch kitchen drawing.

“The market is now comfortable in the 75-month terms.”

– Melinda Zabritski,  senior product director of automotive finance at Experian Automotive

 If you haven’t bought a car in a while, you may be surprised when the car dealer explains that you can buy more car than you thought possible. It’s not a scam and a wishful-thinking salesperson. The changing nature of both cars and car buyers has prompted auto lenders to extend loan terms, bringing monthly payments down.

Those of us of a certain age will remember that in the 1970s and 1980s, a car with 100,000 miles was destined for the junk yard, a hazard no one dared to drive. While the 100,000 mile end-life of a car has been a tough perception to shake, attitudes are changing rapidly.

The Proof Is in the Power Train

Vigorous global competition among auto manufacturers has pushed automobile quality higher over the past 20 years. Today, the classified ads are full of Volvo’s, Honda and more with 200,000 miles and cab drivers brag of getting their Toyota Prius to 600,000 miles . . . with their original batteries, no less!

Not only are cars being designed for longer life, advances in science and engineering have helped created more durable materials. Carbon finishes on parts now approach the strength of diamonds, ensuring that each part remains intact far longer. Hyundai and Kia now include 100,000-mile/10-year warranties on all of their cars’ powertrains.

Increased longevity means that a car’s value as an asset has increased. It only follows then that banks feel more comfortable lending for a longer term. The average car on the road in 1977 was 5.5. By 2014, it was 11.4, a change that indicates not only improved car quality, but a shift in the American mindset.

Pride in Long-Term Ownership

Where once, buying or leasing a new car every two years indicated success and wealth, now it just seems foolish. Conspicuous consumption has been replaced by an ethic of value and sustainability, and car buyers are looking to stretch their dollars by keeping their cars for as long as they can. Banks, therefore, not only have more confidence in the long-term value of the car, but in the trustworthiness of the buyer. Millennials are far more willing to buy a used car than their parents were.

84-month auto loan for red car with cash

Longer Auto Loan Terms Can Mean More Car for the Money

With longer loan terms, buyers are making bigger, better purchases.  The car buyer with a $300 monthly budget may be able to buy new rather than used. He or she may also choose the certified pre-owned car rather than the questionable auto obtained through private sale. While the loan will last longer, the ability to buy a better car provides more value to the buyer. Down the line, as a trade-in or sale, the car will win the buyer more cash. The average subprime loan amount as of August 2016 was $29,359 for a new car and $16,120 for a used car.These figures are up 3% and 1.3% respectively from the same time last year.

If it’s time for a new or new, used car for you, make sure to check out our loans for all credit types, even bad credit!  Those with bankruptcy still on their credit reports still can get a car loan for a used or even new car. It takes just three minutes to apply here for a new or used car loan at the lowest rates!

 

5 Ways to Avoid Going Upside Down in an Auto Loan

Upside down car loan

“Upside down” is only fun for kids.

 Adults know too well it’s all about owing more money on a large asset than it’s worth. More, they are responsible for that debt. Many homeowners were upside down in their home loans from 2008 to 2012.

Some don’t realize that a car buyer, particularly a new car buyer, can spend several months to two years upside down in their car loan. You may ask: what’s the big deal about owing more than the car’s worth if you’re going to keep the car for several years? Problems arise when the car gets stolen or crashed. More serious problems arise when buyers realize they bought too much car and can’t afford it anymore. Unexpected medical expenses, job changes, new babies and even floods and fires have a way of tightening budgets very quickly. Sell the car, and you end up paying the bank an additional $1,000 – $5,000 to fulfill loan requirements.

Car buyers who are smart with their finances take a long-term view. Just a few adjustments to the car-buying plan ensures you won’t go upside down on your car loan.

Buy Used and Make a Good Deal
It’s common knowledge that a brand new car loses 11% of its value the minute the car buyer drives it off the lot. After one year, this new car loses 20% of its value and by five years, many cars have lost half their value. These average numbers don’t reflect the wide variety of car depreciation rates. Depreciation rates are faster for unpopular cars, slow for the popular models. But who knows what will be popular in 5 years?

The bottom line is to let the original owner to pay the first few years’ depreciation costs (one of the highest costs of vehicle ownership). Buy a car that holds its value. Financial planning and organization website Bankrate.com lists the makes and models of autos that hold their value most tenaciously. For 2014, these are the Hyundai Accent, Mazda 3, Chevy Corvette, Toyota Avalon, Kia Soul and Chevy Camaro. Any of these tickle your fancy?

The other advantage of buying a used car with a low depreciation rate is that you’re less likely to have a hangover loan amount into a new loan when you buy a new car.

Put Down a 20% Down Payment
This move will take care of the annoying taxes and fees outright. Paying interest on these taxes bumps these abstract fees even higher. Since car buyers get nothing for these charges, it’s best to dismiss them ASAP. Also, putting down 20% jumps you ahead of depreciation so that you leave the lot with a vehicle worth as much as or more than your loan. Also, manufacturers’ cash-back rebates can go right to that 20% down.

Consider A Loan Term That Is No Longer Than How Long You Plan To Keep The Car.
Some people are in the habit of buying a new car every two years. Others have just as much pride driving a 20-year-old “beater.” While, typically, car loan terms extend to just 5 years, recently, six and even 10-year loans have come into the market. If it’s your nature to keep a car until it dies, a 10-year loan makes sense. If you’re family is changing either by adding or removing members (kids born; kids off to college), you may be trading up or down when those events occur.

Get the Best Interest Rate You Qualify For
Online, and other alternative banks can offer lower auto loan rates because they labor under a fraction of the marketing and operating costs that saddle the large, bricks and mortar banks. More, online banks typically don’t have shareholders demanding higher profits every year. While the difference in the loan rate may be one-half of one percent, these charges add up to thousands of dollars saved over five years.
ALWAYS Comparison Shop to Get the Lowest Price for the Model You Want
Aside from homes (and maybe shoes?), cars evoke more emotion than most other large purchases. Cars reflect our identities. They are accessories we live with from two to 20 years. If you’ve found the perfect pumpkin-spice-colored Kia Soul, rest assured there will be another one across town or in another month. Go into the car dealership with your emotions fully under control. This experience must be ruled by the mind, rather than the heart. Remembering that you’re not just saving another $2,000, but $2,000 plus six to nine percent yearly interest keeps you sober and PICKY.

First Financial Provides Auto Loans, Bad Credit, Good Credit and More!
First Financial has been in business long enough to recognize the subtleties in each borrower’s financial situation. We also know that more than 50% of Americans fall into the subprime category. Their credit ratings range from “fair” to “poor” to “bad.” Our lending partners accept auto loan applications and approve these borrowers every day. Apply for an auto loan here today! Follow us on Facebook to get frequent financial planning tips and research.


First Financial

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