What makes a car loan different from any other type of personal loan?
Not a lot, actually.
The most notable difference between a personal loan and a car loan is that a car loan is always secured against the purchased car, while a personal loan may or may not be secured against an asset.
Car loans are short term loans. They normally go for something like 2-5 years, but can extend to up to 7 years. Typically interest rates for car loans range from 0-10% per year.
Should you lease or finance your car?
Leasing is usually only offered for new cars, though that’s not always the case. Still, if leasing a new car will cost you the same as financing a new car, you may be better off. Most people buy new cars every 4-6 years so leasing can be a good alternative. New cars come with plenty of warranties which reduce maintenance costs. The only problem is the yearly kilometer limit leased cars come bundled with: if you do a lot of long distance driving, leasing is not a good option.
Who offers car loans?
Car loans are offered new car dealerships, used car dealerships, used car lots, some unconventional lending institutions, private lenders and in some cases, even banks.
Often used car lots work directly with banks to finance customers. Sometimes banks pay the dealers directly when a car is purchased and have the customer repay the loan directly back to them, this relieving the car dealership of any financial obligations.
On the other hand, new car dealerships do some of their own lending. For example, Volkswagen has its financing arm VW Finance that takes care of financing new or used car purchases.
Many individuals seek financing from private lenders to buy new cars. Because the loan is secured by an asset (the car), what happens in this situation is that the title of the car is transferred to the lender until the loan is repaid. This is also known as a car title loan.
Of course, if you obtain an unsecured personal loan, you can use the money for whatever you want, including purchasing a new car. However, unsecured loans are small and tend to range only from $500 to $5000, limiting your purchase options.
Learn more about car loans.
Good Credit vs Bad Credit
A lot of used car dealerships advertise bad credit car loans, in fact they sometimes even advertise car loans provided without any credit checks. This is because often the only thing that these sellers are looking for is income and job stability. They are more interested in your ability to pay down a loan than they are in your past credit history.
Having good credit will always help you get financed with a lower interest rate, and will improve your chances of being approved, but note that it does not guarantee these potential benefits.
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