What is the difference between a personal loan and an auto loan?

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Most people cannot afford to pay cash for a vehicle, so they will have to borrow money to buy it. And that begs the question of what is the right kind of financing for this purchase?

You may be wondering “Can you use a personal loan to buy a car?” »Or do you prefer a car loan? To make this choice, you need to understand the differences between how auto loans work and how personal loans work.

To help you make up your mind, here are four key differences between a personal loan and an auto loan.

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1. Personal loans can be used for any purpose, but auto loans can only be used for one purpose

When personal lenders give you a loan, you can use the money for anything you want. Often, lenders don’t even ask you what you are doing with the money.

This means that if you want to buy a car with the money, you can. Or you can pay for a wedding, home renovations, or a big purchase of just about anything you want.

Auto loans, on the other hand, can only be used for one purpose: to buy a car.

2. Auto loans are secured debt, while many personal loans are unsecured.

A car loan is a type of secured debt. The car serves as collateral for the loan. This means that the lender has a legal interest in the car. The lender usually holds title to the car until the secured loan is fully paid off. If you don’t make payments, the lender can repossess the vehicle quickly and easily.

Personal loans, on the other hand, can be either secured or unsecured loans, but many are unsecured. This means that there is no guarantee. The borrower promises to repay, but no assets are linked to the loan. If the borrower defaults, the lender could take legal action and try to get the court to put a lien on their property or garnish their wages, but this is complicated and time consuming. So a lender can’t just take the car if the borrower doesn’t pay.

3. Auto loans may have lower interest rates than personal loans.

The interest rate for a car loan is usually lower than the interest rate on a personal loan. Although the specific rate you will be entitled to varies depending on your financial credentials, it is not uncommon to be able to borrow at a rate of less than 3% to purchase a vehicle. Personal loans, on the other hand, often have higher interest rates than this.

4. It may be easier to qualify for a car loan

Since an auto loan is a secured loan, the risk to lenders is relatively low. After all, if you don’t pay, they can just take your car and sell it to get their money back. Since lenders don’t have much of a chance of losing a lot of money on a car loan, it is usually quite easy to qualify for a car loan. In fact, even people with bad credit can usually borrow money to buy a car.

Personal loans, on the other hand, are riskier because they are unsecured. Thus, lenders may have more stringent credit and income qualifications. Although there are personal loans for bad credit, they are harder to find and the interest rate may be higher.

It is important to consider these key differences when deciding which of these loans is suitable for your vehicle purchase. Many people will find that a car loan is the right choice, but it may not be the case in all situations.


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