Which is better ,a car loan or a personal loan ?
We all want to buy a car as soon as we get into the job. Some people buy cars for the convenience of their travel and some for luxuries. In the recent times, people have started opting for a personal loan instead of the traditional car loan to buy a car. People these days have started looking at personal loans as the most viable and preferred option for making big investments.
Personal Loan Vs Car Loan – Definition
Personal loans come in the form of unsecured loans and they are provided by banks and many financial institutions. People take personal loans to meet their needs and invest in various personal and household sectors. These financial institutions offer personal loans based on a number of factors and eligibility criteria of the borrowers. Factors like income level, employment history, credit score and eligibility come into play before approving a personal loan to an applicant.
Car loans are also known as auto loans. These are loans given by banks and financial institutions to help pay for the purchase of a car. There are many car loans in the market that provide cover up to 80 percent of the total cost of the car. You will have to pay the remaining 20% of the cost of the car.
Personal Loan Vs Car Loan - Difference
The major difference between a personal loan and a car loan is the lack of collateral in availing the loan. In the case of a car loan, the loan covers 80 percent of the total vehicle cost. The rest 20 percent is on you. Now, suppose you don't have money to pay the remaining 20 percent. In such a situation, the car loan will become a burden for you. Here you can get the benefit of personal loan. With a personal loan, you can cover the entire cost of the vehicle and there is no extra cost on your part.
Next comes the interest rate of both the loans. Personal loans have higher interest rates than traditional car loans. This is because the amount of risk involved in a personal loan is higher than that of a car loan. No collateral is required for a personal loan whereas a car loan automatically collateralizes your car.
Personal Loan Vs Car Loan - Which Is Better?
Then comes the biggest question of choosing between the two loans. Considering the pros and cons of both the loans is a daunting task. Personal loans have higher interest rates than auto loans. When it comes to car loans the rate of interest ranges between 8.5% to around 14% and in case of personal loans, the interest rates can easily go up to 20% and sometimes even higher.
If you have a poor credit rating, you should opt-in for a car loan as it will be easier to obtain. A good credit score is required for a personal loan and it is difficult to get one with a bad credit score. The repayment cycle of the car loan will also be longer and the burden on your shoulders will be much less.
What are some car finance details ?
The interest rate you get will reflect your credit score. The best rates are reserved for those with a credit score of 700 or above.
The amount the bank will lend depends in large part on your income and the income-to-debt ratio.
Car dealers are legally allowed to jump in the interest rate. This is called dealer reserve. This little scam is legit and works like this:
The F&I person will purchase the deal and the buyer's credit across the multiple financing sources he or she works with.
Will come back with finance source rate. This is called the purchase rate.
The F&I person will select the finance source which is best suited for them.
The F&I person will collate the purchase rate and provide the bump rate to the customer. So the 3 percent purchase rate is presented to the customer as 5 percent. The F&I person is not required to disclose this collision.
So on a $30,000 loan, the bumped rate results in an additional $1,600 in interest over the life of the 60-month loan. Usually the dealer retains 70 per cent of it and the bank 30 per cent.
To counter this scam always demand, not disclose the F&I person purchase rate. If they refuse to walk away because you can be certain you are being cheated on.
a real story.
A few years ago I helped my daughter buy a new Honda. Her credit union offered a 2.5 percent rate over 60 months.
We agreed on the price and sat down with the F&I manager. The F&I guy came back with 4.3 percent for 72 months.
I requested and it refused to provide the purchase rate for the 60 month loan. He tried the old "you can refinance" strategy.
I said thanks and we got up to leave.
The F&I guy stammered a bit and asked us to give him 10 minutes. we did.
He came back after some time and offered 2.3 percent for 60 months.
The bus raise resulted in about $2,000 in interest reduction between the loan the person initially granted and the loan granted when faced with a running deal out the door.
The lesson is never to trust anyone at the car dealership for what they say or do. Be polite but always verify.
What are you thoughts on car finance ?
After buying a home, buying a car is one of the biggest financial decisions of your life, and you will make it more than once. And when it comes to buying a car, making monthly car payments, or even asking yourself "How do I pay off my car loan?" There are so many options – new versus used versus certified pre-owned, dealership versus independent sellers, base models versus high-end options – it's no wonder the world of cards and credit can be mind-boggling.
Financial choices can be confusing when buying a car. Luckily, I have some car buying tips to help you choose the right car, get the best loan, and work your way to some savings. From dealer scams to credit traps, these five car buying mistakes could cost you thousands.
The car loan is secured against the vehicle you wish to buy, which means that the vehicle acts as the collateral for the loan. If you default on your payment, the lender can seize the auto. The loan is repaid in fixed installments throughout the loan. Like a mortgage, the lender keeps ownership of the property until you make the final payment.
Rate of interest
Given that the lender has financial control over the car -- it is a "secured" loan -- the loan is considered low risk, which generally translates to a significantly lower interest rate for the borrower. Interest rates are also fixed, so borrowers are not subjected to the increases that can be associated with unsecured personal loans.
Terms
Most car loans are settled in 36, 48, or 60 months. And like a personal loan, the shorter the tenure, the higher the monthly repayment and vice versa. A below-average credit history does not necessarily stand between you and your car loan (unlike a personal loan), and it will have little effect on your interest rate or loan amount (which is determined by the cost of the car). Before signing up for a dealer loan, it may be worth checking whether a local bank or credit union can give you a better deal.
Which is better, car finance or loan ?
While buying a car with cash is the best thing to do financially, it is not ideal for many of us. Sure, we can drive the $5,000-10,000 cars we paid for in cash, but that $20,000-30,000 car definitely has good features and is much newer and more reliable.
So here are some rules of thumb that I use.
Make as big a down payment as you can.
Use the shortest loan term that you can afford. 3 years is great. 5 years should be maximum. Shorter terms will give you better interest rates.
Use an online calculator to find the price range and interest rate paid for a particular car before you look at the cars to get an idea of what you can afford.
Look at the total price of the car and ignore "what kind of monthly payment are you targeting" when the seller asks you. That's only increasing the payoff, which will cost you more in the long run.
Before buying from a dealer, shop around for loans from banks and credit unions and get pre-approved. You can still access financing from the dealership, but getting already approved for a loan at a lower interest rate will force the dealership to give you a matching or better rate if it wants financing.
If possible, pay off the loan early. There is a very small penalty for early payment. If you have a 5 year loan, but you get an increase and are able to repay it in 3 years, do it!
Right now, the interest rates on car loans are great. Rates between 2-3% are not unheard of if you have good credit.
And lastly and most importantly, by the time you're 80, it's better to have the best car in the neighborhood than to have the best car in the neighborhood at the expense of working and setting aside money for retirement.
Sincerely Gyani Baba
