Considering a personal loan to buy a car? Here are its pros and cons

Personal loans might be a sensible option when buying a car in some cases. However, since auto loans are usually a better option, it is important to weigh the advantages and disadvantages. A summary of the benefits and drawbacks is provided below to help you decide.

The benefits of using a personal loan to buy a car include:

• Flexibility: Without a doubt, one of the main advantages of using personal loans to buy cars is flexibility. You are not restricted to car dealerships not approving for financing when you have a personal loan. This makes it more likely that you will find a private seller of a used car with a good deal that could save you money. Furthermore, applying for a personal loan could expedite the process rather than waiting for standard car loan approval if you find a good offer from a private seller and need to move quickly.
• Potentially low interest rates: Good credit score can turn the tables when it comes to personal loans versus car loans for car purchases.  While personal loans typically have higher interest rates than car loans, if you have good credit score, you might snag a lower rate with a personal loan compared to a car loan.

Generally, personal loan interest rates are more sensitive to your credit score than car loans. This means borrowers with excellent credit can potentially qualify for much lower rates on personal loans compared to subprime car loan rates offered by dealerships.

• Faster acceptance process: If you pre-qualify with the lender, personal loans may be approved more quickly than auto loans. These loans are frequently not secured by anything, like an automobile, and are therefore considered unsecured. For lenders, this streamlines the appraisal process. Conversely, auto loans utilise the vehicle itself as collateral, requiring extra steps to determine its worth and condition.

A brief loan offer based on a soft credit check is provided upon pre-qualification, and it does not affect your credit score. This makes it possible for lenders to expedite the process of final approval after you apply formally.

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The disadvantages of taking a personal loan to buying a car include:

• Higher interest rates: Because of their inherent differences, personal loans have higher interest rates than auto loans. Auto loans are secured loans, meaning the security is provided by the vehicle itself. Because they can seize the car if you don't make loan payments, this lowers the risk for the lenders. Contrarily, personal loans are unsecured, meaning they are not secured by any tangible assets. Lender risk is increased as a result, and interest rates rise.
• Shorter payback periods: Compared to auto loans, personal loan repayment periods are frequently shorter. Even if the total loan amount is similar to that of a car loan, this means higher monthly payments for personal loans. 

Personal loans are commonly used to consolidate debt or cover unforeseen costs for which a shorter repayment term may be more advantageous. Since cars are meant to last for many years, a longer loan term is required to spread out the cost.

Since personal loans are unsecured, lenders would rather have shorter repayment terms to lower their risk. They get their money back sooner because the periods are shorter. A shorter term may result in higher monthly payments, but overall loan interest will probably be lower. This is because a shorter term permits less interest to accumulate and interest is calculated on the outstanding balance.

• Unsecured nature of the loan: Unlike auto loans, personal loans are not secured. The lender forfeits ownership of the car if you default on the loan. A secured loan is an auto loan. This indicates that the vehicle serves as collateral for the loan. The lender has the right to reclaim the car and sell it to recoup its losses if you don't make your payments (default).

Collateral is not necessary for a personal loan. Due to the lack of a tangible asset to seize in the event of default, the lender takes on additional risk. Because personal loans are unsecured, their interest rates are higher than those of auto loans.

This suggests that in the event of a personal loan default, the lender may pursue further debt collection strategies, like reaching out to you to try and arrange a repayment schedule or notifying credit bureaus of the default, both of which have the potential to seriously lower your credit score.

When buying a car, personal loans are a great option if you have good credit, need flexibility in your search, or want a quicker approval process. But be advised that compared to a car loan, there might be shorter repayment terms and higher interest rates.

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Frequently Asked Questions (FAQs)

Q. What's the most I can get a bank loan for?

Several factors will determine the maximum amount of money you can borrow from a bank. Your monthly EMI shouldn't exceed 30% of your monthly income if you are a salaried worker. The bank or NBFC will also take into account any current loans you have that you are paying back with interest.

Self-employed people will be given loans based on the money they make from their business. Other financial obligations of the person will also be taken into account. The terms and conditions set forth by the lender will also affect the maximum loan amount that can be approved.

Q. Does submitting an online personal loan application have any benefits?

Yes, you can apply for a personal loan online from the comfort of your home, saving a ton of time and effort. Paperless approval is another feature of some third-party financial services websites that let you apply for a loan without having to send any paperwork to the lender so that it to be approved. Additionally, the application process is completely safe.

Q. Is it possible to pay back a personal loan early?

Depending on their terms and conditions, some lenders might let you pay back the loan in full before the deadline. Presumably, there will be a pre-payment fee. Therefore, confirm with your lender.

Q. Why is having a high credit score essential?

A low interest rate loan is more likely to be extended to you if your credit score is high. Your credit score calculates how creditworthy and capable you are of making payments. You need to have a credit score of at least 750 to get loans at good terms. Those with average credit scores might be offered a personal loan at a high interest rate, while those with very bad credit might be completely turned down for one.

Q. What is the duration of the personal loan repayment?

The majority of banks and other financial institutions let borrowers select a loan term that suits them best, ranging from one to five years.