Buying your first car is a thrilling experience. But using your savings to finance it may be a wrong financial move. Can a personal loan give you the required financial aid? Learn if you should finance your car using a personal loan, here. ⭐Personal Finance ⭐Money Management
We set certain milestones that we want to achieve at some point in life. Buying your first car is one such goal. But life is unpredictable, and using your savings to finance such an expensive purchase is not the smartest move. If you don’t have abundant savings, you wouldn’t want to tap into your limited resources. A personal loan could help you finance your car. But remember, there are certain things to consider before you make your decision. We’ve discussed this in detail in this article.
Buying a car with a personal loan
A personal loan is a form of credit provided by lending institutions. Personal loans can be both secured and unsecured. A secured personal loan is one where the borrower uses their asset as collateral against the loan. On the other hand, you don’t have to declare an asset as collateral to secure an unsecured personal loan. Most people opt for unsecured personal loans because it doesn’t require collateral security. Once you get approved for a personal loan, you can use the funds at your discretion.
If you apply for an unsecured personal loan, the lender’s focus will shift to your credit score. Since they don’t have your asset to recoup their loss in case of a default, they need solid proof of your creditworthiness. Thus, your credit score, income, and employment history will be major determining factors of the loan term and interest rate that the lender proposes.
How does it work?
Once you get approval on your loan, you’ll receive the funds in your bank account. After a lender releases the funds into your account, you are free to use the proceeds as per your requirement. You can either buy your car from a dealership or purchase it privately.
Financing your car using a personal loan certainly helps ease your financial burden. Making monthly repayments doesn’t put too much pressure on your finances. But it is imperative to work out a repayment plan before-hand. Missing repayments could be detrimental to your credit score, so ensure that you can afford the monthly pay-offs for your loan.
What’s the difference between car finance and a personal loan?
Car finance or car loan is secured against the vehicle that you’re planning to buy. It is a form of secured finance wherein your car would serve as the collateral. You can repay the car loan over fixed monthly instalments. If you fail to oblige to the repayment terms, the lender can legally repossess and seize your vehicle to recover their losses. The lender retains ownership over the vehicle until you’ve repaid the entire loan amount.
An unsecured personal loan, on the other hand, is one where you do not require collateral to secure the loan. The lender bases their decision on certain factors such as your credit score, income, employment history, etc.
While a personal loan as an option to finance your car is worth considering, you should weigh the pros and cons before resorting to this option.
Should you use a personal loan to buy a car?
There are pros and cons associated with any form of credit. You should weigh all your options before coming to a conclusion. Here are some merits and demerits of using a personal loan to finance your car:
- It’s a relatively simpler way of financing your vehicle.
- You can finance your car either fully or partly, as per your convenience.
- You can bag a great deal on your personal loan if you have a good credit report.
- Your interest rate can be fixed or variable, depending on the lender you choose.
- You have the liberty to choose the loan term. Do keep in mind that you will end up paying more in interest in a longer loan term.
- Unlike a car loan, you fully own the vehicle while paying off your loan.
- Monthly repayments can be mentally taxing for some.
- While some lenders may provide you with the funds almost immediately, some may take longer to process the loan.
- If you have a tendency of borrowing too much, you may end up borrowing more than you planned. This could make it difficult for you to repay the loan, pushing you into debt.
Tips for financing your car with a personal loan
Here are some tips to help you assess if you should finance your car with a personal loan.
- Shop around for the best rates: When considering a personal loan, you need to look beyond the interest rate. Check the overall cost of your loan – the APR. A loan with a low-interest rate could still have a higher APR. Therefore, it is best to shop around for loan offers before choosing your loan offer.
- Avoid making multiple applications within a short span: With each personal loan application, you allow lenders to perform a credit check on your profile. Too many credit checks in a short span can harm your credit score. Leave a gap of at least 15-30 days between your applications. Because a soaring credit score could hamper your chances of securing a loan in the future.
- Check the monthly repayments and total cost of your loan: Check the amount of money you will be required to pay each month. Having a set number will help you accommodate that cost in your budget. This is a great way of organizing your outgoing payments. Additionally, knowing the total cost of your loan will help you see whether or not you can afford it. Knowing the overall cost will help you find the most affordable option, within your budget.
- Ensure that you can afford the loan: Checking the total cost of the loan will give you clarity on your affordability. Borrow only what you can afford. Low-interest rates can be enticing, to begin with. But if you end up borrowing more than your means, you may, eventually, fall into a debt trap.
- Check the kind of interest that you’ll be charged: It is important to know what kind of interest the lender will charge. In most cases, lenders charge a fixed interest rate, as opposed to variable interest. People prefer a fixed interest rate because it stays intact throughout the loan term. Variable interest rate, on the other hand, can change over time, based on an underlying benchmark interest. Therefore, you must check the type of interest that your lender will levy on the loan amount.
A personal loan is a powerful financial tool that bridges the gap between your dreams and their fulfilment. But all forms of credit have their own pros and cons and it is crucial for you to weigh them before forming a decision. Ensuring that you have the means to repay the loan before borrowing the money is essential. Default doesn’t just harm your credit score, but could potentially land you a CCJ (County Court Judgment).
In case you plan to settle your loan before the end of the loan term, talk to your lender. Some lenders charge extra for premature settlements. If the fee isn’t nominal, assess if it is even worth repaying before the term ends.
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