Car Loan or a Personal Loan: Which is Better for You?


Car Loans vs Personal Loans | CompareHero Malaysia

A car is one of the biggest long-term investments you can make, going a long way into making your daily commute and leisure trips more convenient. However, not everybody can afford to just drop cash on a car like they would for a Starbucks frappuccino. When the money in your bank account is not enough to cover the full list price for your dream car, your only other alternative is to go for car financing.

In many places, banks and car dealerships provide car loan options tailor-made for paying off the cost of your vehicle. Most car dealers have their own in-house financing schemes, but these tend to be higher when compared to more competitive prices of bank loans. Less widely known is the option of taking out a personal loan, usually offered by banks for a wider range of expenses ranging from a new house to vacations abroad.

So, should you go for a car loan or a personal loan?

First, the essentials

In either case you would need to pay attention to vital details like the cost of your monthly payments, interest rates, and payment terms. Usually, the first thing you look for in car financing is a monthly payment/ interest rate combo low enough to fall within your budget. Online auto loan calculators by AutoWorld, Calculator.com, and other similar sites can help you figure out the cost of your monthly payments. Never dive into a deal without factoring in the actual full amount you’re paying for your intended vehicle.

Payment terms are also an important factor: you may be tempted to go for a longer time period so you would pay lower monthly fees, but a shorter term means you pay less piled-up interest over time. Would you stay comfortable paying the same rate for the same vehicle five to seven years in, when the “new car” high has long worn off?

Types of Loans

Car loans are actually a variation on personal loans, structured to factor in the depreciation of a car’s value over time. Car loans often require you to make a sizable down payment early into the term. The bigger your deposit, the lower your succeeding monthly payments.

Personal loans, meanwhile, can be either secured or unsecured: the former is backed by assets you already own for the lender’s security, while the latter is determined solely on the basis of your credit status.

Interest Rates

Interest is what you pay your lender in exchange for letting them finance your car, and can make a huge difference in the ease of your payments. Interest rates are calculated based on the car’s list price and your current financial situation. Personal loans tend to have higher interest rates than car loans, but can be lowered in the case of secured loans. Whenever you can, opt for a loan with a simple interest scheme over compound interest.

New vs. Used

Most car loans are packaged especially for brand-new or Certified Pre-Owned (CPO) vehicles. When doing research on the car you wish to buy, always check which car loan alternatives are most applicable to your planned purchase. When buying secondhand, work closely with the original owner to see if car loans are an option for your transaction. If you are planning to buy a much older vehicle or if no dedicated car loan options are available, consider getting a personal loan. Learn more about deciding whether to buy a brand new or used car.

Your Credit Score

If you choose to apply for a personal loan, lenders are likely look into your credit score rating. This is their assurance that you have the ability to make your payments on time. Should you have a less-than-ideal credit score, you will have better chances in getting a car loan than you would a personal loan. Either way, poor credit means you get saddled with a much higher interest rate. Ideally you should settle as much of your outstanding credit debt as you can before you begin applying for any kind of loan.

The Repossession Question

Obviously, you want to minimise the likelihood of defaulting on your loan whenever you can. In the event you’re unable to make your payments, what happens afterward varies depending on the loan you get. When you default on a car loan or an unsecured personal loan, the lender seizes your vehicle.

Applying for a secured personal loan gives you more options on what personal assets are at stake if you default, allowing you to keep your car. Just whatever you do, do NOT stake your house in a secured personal loan for your vehicle.

No matter what kind of loan you apply for, it’s important for you to shop around for lenders with better prices or more flexible terms that work with your current income. The same bank may offer completely different rates for a friend or a colleague, depending on their circumstances. If you can, make all your inquiries within a two-week period to prevent any further damage to your credit score. A car may be a huge commitment, but your wallet doesn’t have to suffer for it.

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