Shopping around for a new car involves a lot of research and planning, especially when it comes to ways you can finance it. There are a number of different options in financing a car, one of them is through a personal loan.
While there are specialised car loans to fund a new or used vehicle, more people are turning to personal loans to buy the car of their dreams. A personal loan can be used to purchase a car from a dealer or private seller and is a great way to finance a car if you don’t have the funds upfront or to pay for additional tech gadgets for your car. It also gives you the opportunity to pay off your loan faster with greater flexibility in payment structure.
Reasons why people are using a personal loan to finance a car
Although car loans are a type of personal loan, they are usually at a fixed interest rate. What this means is they don’t offer the flexibility a personal loan holds, making repayment slightly more limited in terms of the speed in which you can pay off your car loan.
This is one of the reasons why more people are choosing to take out a personal loan instead of a standard car loan when buying a car. In fact, a recent study found 14.1% of millennials, 12.0% of Gen Xers, and 11.4% of baby boomers had used a personal loan to buy a vehicle.
Unlike a car loan, personal loans are not tied to the value of the car—they don’t use your car as security. This means you can still retain the car rather than have it repossessed if repayments aren’t met on time. This makes a personal loan a very attractive choice to anyone expecting a change in finances over the next few years, such as a wedding, new baby, or the purchase of a bigger house.
A personal loan allows for flexibility in payment structure and a lot more range of loan options. If a borrower has a good credit rating, they may also find themselves with some attractive interest rates.
Personal loans can also cover the cost of vehicle modifications, unlike a car loan. Personal loans also take less time to apply for since all you need to declare is the purpose of the loan.
Finding the right loan to purchase a car
The type of loan you choose will depend upon your financial circumstances. Generally, a personal loan will most benefit those who have a good credit history. This is because your credit score will influence both the loan amount and the interest rate, which can be either fixed or variable. The higher your credit score, the lower your interest rate, and vice versa.
Personal loans have a set repayment period, usually between the minimum one-year period and the maximum of seven to ten years, depending on why you need the loan and your financial circumstances.
A fixed-rate personal loan will provide you with the security of a fixed interest rate where you’ll know exactly what your repayments will be for the life of the loan.
A variable-rate personal loan will allow you to make additional payments to pay off your loan faster, saving you interest.
There is a lot to consider when choosing a personal loan to buy a car—the most important things to look out for prior to committing to either a fixed or variable loan include:
- How much you can spend/budget
- What interest rates can you genuinely afford
- The state of your credit score—is it in good shape?
- Would your budget better suit a lower interest rate or flexible repayment options?
- How long do you want your loan to last?
- Do you have the ability to repay your loan early?
You should also look into different features offered by a personal loan, including:
- Low fees
- The minimum and maximum borrowing amount the lender allows
- Does it offer a redraw facility, which provides you the ability to withdraw funds you’ve already repaid
Interest discounts and incentives might lower the cost of the vehicle and thus the finance amount considerably. For many new purchases, financial incentives are often sponsored by the manufacturer, the dealer, or another agency. In Australia, you should take note of a 0.70 percent finance discount that is funded by the CEFC for people who choose to purchase an electric vehicle.
Choose the loan best for your budget
More people are using a personal loan to finance a car over a traditional car loan. Reasons for this may include the flexibility personal loans offer, where the vehicle itself isn’t used as collateral.
When you take out a personal loan, you can typically use the money for anything you want. In terms of using a personal loan for a car, borrowers find it gives them more value for money.
They can generally choose an old or new vehicle, they can purchase from either a car dealership or private seller, and they can make modifications to the car. A car loan, on the other hand, has more buyer restrictions on what types of vehicles a person can buy and where they can buy the vehicle from.
Taking the pain out of payments
Whether you have purchased your car with standard auto financing or taken a personal loan, you can reduce the burden of payments even further by renting it out when not in use.
In an Uber-like model for car sharing, evee have a virtual fleet of cars that belong to private individuals. If you sign up for the service, you could make your newly purchased Tesla available for sharing a few (too many) days each month.
Evee handles all the marketing and rental transactions and can even help you insure it properly for such use. Participants report netting between $5 – $20K per year, which may exceed your payment outlay and make a new car purchase a smart idea.
