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Personal Loan vs Car Loan: A Comprehensive Guide

Jacaranda Team

Jacaranda Team

December 15, 20204 minute read
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If you’re about to make a major purchase like a car by borrowing money, chances are you’re stuck on a mind bugging question. Should I take a personal loan or a car loan? While they both have similarities, they’re major differences to consider before landing on one that suits your need best. This article will be explaining the unique features of each of these loans, stating pros and cons, in a bid to help you make the most informed decision.

What is a personal loan?

A personal loan is a loan provided by a bank or a non-banking financial institution to meet the needs of the individual. It’s a lump sum offered, that can be used at the discretion of the borrower for anything from buying a house to throwing a beach party. Personal loans can be secured at times but most times it offers unsecured loans. Meaning you can borrow money without having collateral. Qualifying for a personal loan will depend on a number of factors like credit history, employment history and income level.

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    What is a car loan?

    A car loan, as stated in the term, is made specifically to aid with the payment of a car. The car itself serves as security and collateral for the loan and can be seized if you keep defaulting on loan repayments. It mostly comes with fixed rates and can help pay off up to 80% of the total cost, leaving you with the remaining cost, depending on the contract you sign.

    What are the major differences between a personal loan and a car loan?

    It’s important to understand some key differences in interest rates, security requirements and loan approval before deciding on the best choice for you. A personal loan can also be used to buy a car, but the terms and agreement differ significantly from that of a car loan. Here are some factors to consider;

    Interest rates

    Personal loans offer both fixed and variable rates but car loans mostly offer fixed rates. Car loans also offer lower interest rates because they’re secured. This can in turn save you a lot of money in the long run. However, this puts your vehicle at risk if you’re unable to pay back. Personal loans mostly come with a higher rate when it’s unsecured. This is because the lender is mostly at risk


    While car loans can be used to pay for a car alone, personal loans offer a wide range of options. You can take a personal loan for home improvements, car upgrading or any other major purchase. It also allows you to pay faster with the variable rates option. Car loans limit the funds to the vehicle.

    Collateral Requirements

    Personal loans have the option of being secured and unsecured but most people choose the unsecured option. In this case, you don’t have to worry about having collateral. A car loan, however, is a secured loan that holds the vehicle as collateral. Like a mortgage, your lender retains ownership on the car if you fail to make loan repayments.

    Pros of a personal loan

    More flexibility

    A personal loan offers variable rates that let you pay off your loan with respect to your financial level.

    No collateral

    A personal loan gives you the option of a secured or unsecured loan. An unsecured loan puts you at no risk of losing your car, but you might have to pay a higher interest.

    No funding restrictions

    With a personal loan, you can decide to fund anything with no restrictions. It is not limited to just your car. Funds from a personal loan can be used for a holiday, business or debt consolidation.

    Full ownership

    A personal loan offers you full ownership of the vehicle as soon as you purchase the car. Market value and devaluation doesn’t affect your car loan payments.

    Cons of a personal loan

    Higher interest rates

    A personal loan mostly comes with no collateral. In this case, the lender is more at risk and will have to make up for this by offering a higher interest rate.

    Stricter lending requirements

    Because they’re no collaterals, the lender would have to carefully scrutinize before borrowing money. You’ll need a good credit score and history to qualify for a personal loan.

    Pros of a car loan

    Lower interest rates

    Car loans are secured and as a result, they offer a much lower interest rate. This can save you a lot of money in the long run

    Fixed rates

    Car loans come with a fixed rate that allows you to properly budget with assurance over a loan term.

    Less strict lending requirements

    Your car already serves as security for the loan, so most times lenders do not require you to have a good credit score.

    Cons of a car loan

    Puts your car at risk

    Your collateral can offer you a lower interest rate but this also means that vehicle is at risk if there’s default in payment.

    Deposit requirement

    You’ll to make an initial deposit before securing a car loan

    Partial ownership

    You do not get full ownership of the vehicle till the end of your loan term.

    Funding restrictions

    A car loan is restricted to funding just your car. You can’t possibly use a car loan for home improvements or to throw a party. It comes with higher restrictions that are duly monitored.

    The right loan to pick fully depends on you and your financial situation. You might want to take time to consider the features that suit you best since it’s a loan you’ll be paying for a long period. Here are some questions to ask yourself;

    • Is my credit good enough?
    • Do I want to place my car as collateral?
    • What interest rate can I afford?
    • Do I need money for other things?
    • Do I want flexibility on repayments?

    The answers to this question will help you decide the best loan for you. Compare lenders and work out your interest rates and total cost.





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    Jacaranda Team
    Jacaranda Team

    Written by Jacaranda Team

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