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Should you use a personal loan to buy a vehicle?

[May 15, 2011.]

 

Buying a vehicle is a major investment for most people. While the ideal scenario would be to pay cash for a car, that isn't an option for many people. So whether you are purchasing a new or used car, it is important to line up the right financing. Here are some things to consider about getting an auto loan versus a personal loan.


Unsecured vs. secured loans


Many people use personal loans to buy cars. Banks and credit unions are popular sources for these loans. With an unsecured personal loan there usually is no collateral required so you end up guaranteeing it with your signature. With an auto loan the vehicle you purchase serves as collateral. That means that if you default on the loan the finance company can take your car.


Interest rates on loans


Having a personal loan without putting up collateral also means you would probably have a higher interest rate than with an auto loan. But regardless of which type of loan you go with, you'll need a good credit score to qualify for the best interest rates. Take time to fix your credit if necessary before applying for a loan to buy a car.


Can you qualify for a loan?


Not only is having good credit important, but you'll also need enough income to make the monthly payments. Lenders also want to know that you aren't already carrying too much debt. If you come across as too risky, you'll have a tough time qualifying for a loan. Some auto dealers will encourage you to find a co-signer before they approve a loan application. However, keep in mind that it could be difficult to find someone willing to co-sign because they don't want to accept responsibility if you don't pay back the loan.


Negotiating power


You may have more negotiating power when purchasing a car if you use a personal loan instead of financing through an auto dealer. Auto dealers often try to get you to focus on monthly loan payments when you want their financing. This can make it confusing to understand exactly how much you are paying for a car. Lining up a personal loan before going car shopping leaves you free to negotiate the actual price of a car, so hopefully you'll get a better deal.


 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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