Deciding between an auto loan and a personal loan will depend on several factors.
If you’re planning on buying a new vehicle, you might be considering taking out a loan for financial help.
Auto loans and personal loans are the two most popular financing options for Canadians who are interested in buying a new car. Although these two kinds of loans are similar, deciding between an auto loan and a personal loan will depend on several factors. Before you sign the dotted line with a lender, ensure that you know the difference between auto loans and personal loans. Here’s what you should know:
1. An auto loan is a secured loan
A Secured Loan is a type of loan that has collateral attached to it. In the case of an auto loan, the collateral is the vehicle that you purchase. A lot of people will opt for an auto loan when buying a car because it’s quick and convenient to obtain and having the best credit score isn’t necessary to be approved. Personal loans are generally Unsecured Loans, which mean there is no collateral attached.
Defaulting on your auto loan’s fixed payments may result in repossession by the lender until you can afford to pay back your creditors, and having a history of repossession on your credit file will be troublesome in the future. Nobody wants to deal with missed payments, so if you’re not currently receiving a steady income, you might want to rethink applying for a secured loan.
2. There are no restrictions on how personal loans are spent
Personal loans allow you to borrow money for a wide variety of things – there are no restrictions on how you spend the funds. The freedom of a personal loan is why a lot of Canadians prefer them over auto loans. However, being approved for an unsecured personal loan means you typically should have above-average credit and a good credit history. Although, Canadian programs like Fresh Start Finance offers unsecured loans to Canadians who have less than perfect credit. For Canadians who are looking to rebuild credit and get their finances on track, the freedom of a personal loan might be your best bet.
3. It all comes down to your individual circumstance
When deciding if you should apply for a personal loan or an auto loan for your next vehicle purchase, it all boils down to what you believe will be the best option for your individual circumstance. In terms of credit and repayment history, we suggest obtaining a copy of your credit score and doing research online before you visit a dealership. Comparing loans online will help you get the best rates available.
Looking to finance a car with less-than-perfect credit? Visit Canada Drives to see how we can help today!