Buying a new car can be overwhelming. Should you apply for a loan or choose to finance your car? What’s the difference between the two? We break down what you need to know.
The Difference Between Personal Loans and Car Financing Options:
Personal loans and car financing options both involve borrowing money to pay for a new or pre-owned car but they have one basic difference. With a personal loan, you can borrow money from a lender and own the car right away. Car financing doesn’t allow you to own the vehicle outright. You must return the car at the end of the term or choose to pay to own the vehicle.
Car Finance:
With car finance, you can choose among a range of agreements to help pay for your car. These agreements include hire purchases, personal contact purchases, or leasing. A hire purchase requires a deposit and monthly payments that cover the cost of the car. At the last payment at the end of the term, you will own the car. With a personal contract purchase (PCP), your monthly payments won’t cover the cost of the car. At the end of the term, you can return the car, exchange it for a new model, or pay the difference to own it. The leasing option involves monthly payments over the term, but you will have to return it at the end of the term.
Auto Loan:
A standard personal loan or an auto loan allows you to pay the value of your car plus interest in monthly installments over a set term between one and seven years. Short term loans usually carry lower interest rates. Your credit score and income determine the terms of the loan you will get. If you have healthy credit ( a score of 661 or higher), you will find better interest rates.
When it comes to choosing between a personal loan and a car finance contract, you need to account for your credit score, your income, and your dream car. With a good credit score, a personal loan with low-interest rates might be cheaper. However, if you choose a car finance option, you may be able to find a deal with 0% interest. However, you will still need to put down a large down payment and have a good credit score.
Whichever option you choose, take the time to research and compare quotes online to find a financing option that works for you.
