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Buying a new car can cause a huge hole in your wallet, so choosing the best way to finance it will help you save money. While you can go with a personal loan or a car loan, bear in mind the conditions and rates imposed by each one. We’ll walk you through how both loans work and which one you should use to buy your next car.
Overall comparison
| Car Loan | Personal Loan | |
| Average Rate*Rates for good credit | 3.64% for new car5.35% for used car | 15.5% |
| Loan Type | The most common is unsecured, but you may find secured ones. | Secured |
| Terms | 2-6 years | 2-7 years |
| Down Payment | Yes | No |
| Pros | These normally have better ratesAre easier to obtain | There is no limitation on the expenditure of the funds |
| Cons | Funds are specifically for car purchasesUsually need down payment | Usually come with higher ratesHard to obtain with low credit scores |
Interest rates
When determining interest rates, your credit score is crucial. It will determine your borrowing capacity and the cost of borrowing. The higher your credit score, the less it will cost to borrow money and conversely.
While personal loans are commonly unsecured – meaning there is no collateral to back them up, car loans are secured (by your car). These come with pros and cons on each, starting with higher rates for unsecured loans. A higher borrowing risk comes with higher rates for you.
Car loans have lower fees as they get classified as secured loans. Your bank or lender has legal control over the car you purchased until you fully repay your loan.
Which one is best for you?
The most common way for people to finance a car purchase is with a car loan. However, these loans need a down payment while personal loans do not. When shopping between loans, ask yourself if you have any assets to use as collateral for a secured loan, which interest rates you can support, and if your credit score enables the loan you aim to. Auto loans are best for people who want cheaper financing for their car but are willing to pay a down payment for it. Even though you might find a car loan that does not require a down payment, it would be better to put one down to lower your rate.
On the other hand, personal loans are best for people that do not want down payments and are willing to pay higher rates for unsecured funding.
Can you get an auto loan with a low credit score?
There are loans for every credit profile, even with a low credit rating. The thing is, you will get higher rates than the ones imposed on good scores. You can save for a down payment, which will increase your chances of approval and help you reduce your interest rates as well as your monthly payments.
How can you apply?
The application process for both loans is very similar. You can start by:
- Checking your credit score – You can do it for free at Crediverso, and you will know which loans you are eligible for.
- Comparing – Shop around for the best offers before sticking to one lender. Compare rates, loan terms, and the overall lending conditions.
- Pre-qualify – Most lenders have the option to get pre-qualified for any loan without a hard inquiry on your credit report. It will give you a better idea of your estimated lending amount and rates.
