When you’re thinking to get a new car or truck and considering what your borrowing options might be, we spell it out on when a personal loan might make sense over an auto loan.
Most used cars will cost over $20,000, and new ones are much more. If you don’t have the cash sitting in your bank account, you’ll probably need a loan.
Advantages of personal loans for cars
Using a personal loan to purchase a vehicle can have its advantages. With an unsecured personal loan you are free to use the funds however you choose, from purchasing the vehicle to using for modifications, upgrades, insurance or something else.
Most auto lenders will only allow you to borrow for vehicles of a certain age, and if it’s older than about 7 to 10 years old, an auto loan might not be an option. When it comes to a personal loan, you can finance any vehicle you want.
If you are buying from a private seller rather than a dealer, a personal loan might be an option. Or if you were buying from a platform like AutoTrader that didn’t involve a dealer or financing options.
When personal loans for cars are not a fit
If you are looking at buying a newer vehicle, an auto loan is usually the better option. An auto loan is a secured loan that uses the vehicle as collateral, reducing the risk to the lender if you were unable to make your payments as they could repossess the vehicle to get their money.
What if I have bad credit?
Even though most car loans come with an interest rate since the loan is secured by the vehicle purchase, when you have a less than perfect credit rating it can be worth comparing your options with a personal loan as you might find a better rate this way. Having bad credit doesn’t always mean you can’t get approved for a car loan, but it can mean you might only be able to get approved for ones with higher interest rates.
How Much Will a Loan Cost?
Canadians usually spend between $400 to $800 towards the average monthly car payment, but the overall cost will depend on a few factors. Some of these include the price of the vehicle, the interest rate you are eligible for and the length of the term for the loan.
The amount that you put as a down payment also helps lower your monthly payments. You should also understand that taking a longer loan term may reduce the monthly payments, but it will cost you more in interest overall.
There can be other fees involved as well, such as origination. You should make sure to read the agreement carefully before signing to avoid surprises. Once you sign, you are bound to the terms, meaning you have agreed to the agreement and negotiations are no longer an option. In some loan terms you may find late payment or early repayment fees.
When looking at the agreement you should also pay attention to the annualized percentage rate (APR) probably more than the interest rate. The APR takes other fees or costs into consideration and presents a better picture of the total cost of borrowing.
Most loans for a car usually carry a term of about 48 to 60 months, but some auto loan terms may go as long as 72 months. It is possible to get terms that are even longer, just remember that the longer the term the higher the cost to borrow.
What is my eligibility for a personal loan?
Being approved for a personal loan for a car is similar to any other reasons when borrowing an unsecured loan. Lenders will look at your credit score, income, length of time at employer (and sometimes residence) along with your debt to income ratio. This process is about determining your creditworthiness, and how likely you are to repay the loan.
Most lenders want to see a debt to income ratio (DTI) below 30% as this suggests the extra expenses will be manageable and you won’t have difficulty making payments. They will calculate your current ratio, and also what it might be hypothetically if you were approved and what the new ratio would be as a scenario when evaluating your request.
Most banks prefer borrowers with a credit score of about 700 or greater, but there are online lenders that are willing to work with people that have a fair or poor credit score. Those with a fair credit score in the low to mid 600’s will still find several options when it comes to borrowing. It becomes more challenging to find lenders when your credit score is below 600, but options do exist. The lower your score, the higher the interest rates are. Having all the facts before you apply for a personal loan is an important part of the process.
RELATED: Should I Get a Personal Loan?
Car Loan Shopping and Comparison Tips
Decide on the vehicle before you visit the lot. This will make the process much easier.
When you do start getting in the office to talk about financing, plan to make your purchase within 30 days or less. When credit inquiries are run, the credit bureaus allow a window for comparison, regardless of whether its for a car, home or something else. If you are loan shopping beyond that window, those inquiries will probably affect your credit score later.
Only borrow as much as you need, and try to keep the term as short as you can afford as far as the monthly payments are concerned.
What Car Should I Get a Loan for?
With so many variables, only you can answer what the right vehicle might be. A starting point is often the type of vehicle and if there are certain needs. If it’s a work vehicle you might need a van or pickup truck. If it’s for personal use you would have to decide whether an SUV, minivan or car is preferred, along with choosing between performance or economical options.
Some basic questions that can help you decide the right vehicle for you are:
What is your budget? What you can afford should be the first question you ask yourself. There is no sense in looking at Ferrari’s when your budget might be more suited to an economical domestic model.
What are your needs? Choosing the right vehicle has a lot to do with what you need it for and how you anticipate you might use it.
Other questions you might ask yourself include what features you need, what features you want, new or used, what brand, what size and so on.
Car features can vary greatly, and you have to decide what’s important before you start shopping around for what’s important to you. It might be gas mileage or towing capability, or you might be interested in comfort features like spacious seating. Perhaps its technology features like in-car Wi-Fi, hands-free Bluetooth or an Infotainment package.
In addition to features, there are all kinds of makes and models from sedans, coupes, hatchbacks and sports cars to crossovers, SUVs, vans or luxury providing lots of choices, along with a number of decisions to make before you start visiting the lot.