Why You Should Never Use A Personal Loan To Pay For Your Car
 

Why You Should Never Use A Personal Loan To Pay For Your Car

If you are looking to purchase something major like a new car, or you need some extra funds for a personal project, taking out a personal loan or getting vehicle finance could be a solid option. But which one is the best option? In this article we will look through the pros and cons of each.

Personal Loan Or Vehicle Finance? Which Is Best?

Personal loans and vehicle finance represent two of the most common financing options. If you happen to meet their respective lending requirements, they can be relatively easy to obtain. Nowadays, most lenders accept online applications for personal loans and vehicle finance, both of which you can find on Likemoney.co.za.

So what’s the distinction between the two? A personal loan can be utilized for a wide range of purposes, whereas vehicle finance (as the name suggests) is entirely for the purpose of purchasing a car. If you need cash to buy a car, you could simply take out vehicle finance, but if you require funding for  a purpose thats less specific or falls outside the typical lending box like home improvements or to pay for a wedding, a personal loan provides more flexibility.

Each type of finance bears its own pros and cons, so it is important to weigh and compare them before signing on the dotted lines.

Personal Loans (Unsecured):

A Personal loan provides the borrower with funds from a lending institution, generally a bank. The full loan amount is paid in a lump sum that can be used at the borrowers discretion. Personal loan amounts typically vary from about R10 000 to R500 000. A personal loan can be secured against a collateral (something of value) like a car or home. This allows the lender to seize your asset to recover its losses in the event that you can’t pay the loan. However, most people choose “unsecured” loans which means they are free from collateral.

Generally speaking, unsecured personal loans have higher interest rates than compared to secured loans with a collateral. Unsecured loans also entail more stringent approval requirements, so you will want and excellent credit rating on your side. If your credit rating is low, a personal loan might not be an option.

Summed up pros and cons of personal loans:

Pros:wired-26012016-301x230

  • Flexability in payment structure (short vs long) (12,24,36 months).
  • No restrictions of how funds are spent.

Cons:

  • Interest rates are likely to be high.
  • Tougher lending requirements.
  • You need a good credit score.

 

Vehicle Finance (Secured)

This is basically a car loan. The loan is secured against the car you intend to purchase. This means that the car is a collateral for the loan. If you default on your repayments, the lender can seize the car. The loan is paid off in fixed installments over the period of the loan. Much like a mortgage, the lender retains ownership over the asset until the final payment is made. Given the fact that the lender has financial control over the car because its secured, the debt is deemed a lower risk, this means that you will probably have a reduced interest rate. Interest rates will be fixed.

Conclusion:

With regards to purchasing a car, numerous buyers will decide for a dealer-financed car loan because your interest rate will be a lot lower than that of a personal loan. Plus its quicker and more convenient. But in the end it all comes down to weighing up pros and cons against the light of your individual circumstances.

Ask yourself these questions:

  • Do I have collateral with which to secure the loan?
  • What interest rate (and associated repayments) can I genuinely afford?
  • Is my credit in good enough shape?

Let Likemoney.co.za help you.

Likemoney.co.za sources most financial products found on the South African market. Likemoney does a social media comparison of the most “liked” financial products on the market to get you unbiased ratings. This way you can find the best personal loan or vehicle finance deal from the comfort of your home.

Compare personal loans Or Compare vehicle finance

 

compare-personal-loans

 

Summary
Why You Should Never Use A Personal Loan To Pay For Your Car
Article Name
Why You Should Never Use A Personal Loan To Pay For Your Car
Description
If you are looking to purchase something major like a new car, or you need some extra funds for a personal project, taking out a personal loan or getting vehicle finance could be a solid option. But which one is the best option? In this article we will look through the pros and cons of each.

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likemoney.co.za


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