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Personal Loan vs. Car Loan

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August 4, 2020


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Are you looking to purchase a new Land Rover, but you don’t have the funds readily available to do so? Well, you don’t have to put your dream on hold – there are various financing routes available to cover the cost.

This is evidenced by the different loan types out there. Whether it’s a short term loan or one secured the traditional way through a bank, you’re not short of options. However, two of the most popular are personal loans and car loans.

Personal loan or car loan: what’s the difference?

When you secure a personal online loan, you are essentially free to use this as you wish. Aside from purchasing a vehicle, you could use it for more or less anything, from setting up a business to paying off a financial emergency.

A car loan is much more restrictive. As you can likely gather from its name, you are only allowed to use this loan to purchase a vehicle. It’s not applicable to anything else you might have in mind.

The difference is not as straightforward as that, of course. Both loan types have various advantages and disadvantages, as you would expect. So before you settle on one of these loans for your situation, it’s important you weigh them up against each other.

Personal loan

A personal loan is available from a bank or other lending institution, and it provides the borrower with a lump sum they’re free to use at their discretion. While this can be secured against a valuable asset, most people go with an unsecured loan – aka one that doesn’t involve collateral.

If collateral isn’t part of the deal, a personal loan might have high-interest rates attached. As Money Supermarket spotlights, you should ideally have a strong credit score, too. However, there are loans out there who might still consider accepting you, even with bad credit.

Your credit score affects two different aspects. Firstly, it dictates the amount of money you are allowed to loan. Secondly, it influences the interest rate that is imposed on this borrowed amount. This means the better credit score you possess, the more you can borrow and at better interest rates. If you start to build better credit, some loan companies will see that you are demonstrating better habits, and, as a result, could consider you.

Car loan

When you acquire a car loan, you do so by securing it against the vehicle you’re purchasing. This means the car acts as your collateral. If you fail to make your repayments on time, the lender is within their right to seize the vehicle. They have ownership of the car until you complete the final payment. Often, as well, to secure the loan, you will often have to pay an upfront deposit – which won’t be cheap if you’re getting a new Land Rover.

The good news is that you’ll typically benefit from a lower interest rate. It’s a secured loan, so it is seen as a much lower risk than the unsecured alternative. In addition, interest rates are fixed. An unsecured loan can increase those rates unexpectedly and at any time, whereas that’s not a concern with a car loan.

Another advantage is that, even if you only have a mediocre credit history, you still have a great chance of securing a car loan.

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