Personal loan or car loan: Finding the right financing option for your car

cost of owing a car

Purchasing a car is a significant decision, and once you make up your mind, you begin an exciting journey to find the perfect vehicle for yourself. You test drive cars, take recommendations from friends and family, make quick comparisons, and ultimately select the ideal car. However, one crucial aspect of this journey is deciding on the best financing option. While many Filipinos may opt for a car loan, some may suggest a personal loan as an alternative. This article will guide you through the differences between personal and car loans, helping you decide when to finance your car. Let's begin!

KEY TAKEAWAYS

  • Can I buy a car with a personal loan?

    Yes. A personal loan offers the flexibility to cover various personal needs, such as purchasing a new car. However, it typically comes with a higher interest rate compared to a dedicated car loan.
  • How much is the down payment for a car?

    The down payment amount for a car loan in the Philippines can vary depending on the lender, the car's value, and your creditworthiness. Generally, banks prefer a down payment of at least 10-20% of the car's price to reduce their risk. A larger down payment can also translate to lower monthly amortization and potentially better loan terms.
  • How long does it take to get a car loan?

    The processing time for a car loan application can differ slightly between banks. It usually takes around 3-5 working days for initial loan approval, with additional time for document verification and car dealership coordination.
  • Can I finance a secondhand car through a loan?

    Yes. Many banks and financing companies offer loan options specifically for used cars. However, the age and model year of the car eligible for financing might be limited.
  • What is the chattel mortgage fee, and how much is it?

    The chattel mortgage fee is a one-time charge bank levy when granting a car loan. It essentially registers the bank as a lienholder on the car title until the loan is fully paid. The fee is typically a fixed percentage of the loan amount, usually ranging from 1% to 2%.
  • Personal loan or car loan

    Also Read: When and why to refinance your car loan

    Personal loans

    A personal loan is a sum borrowed from a financial institution, such as a bank, credit union, or online lender that can be utilized for various personal needs. These needs may include buying a car, consolidating debt, financing home improvements, or paying for unexpected expenses. Unlike specific loans like car loans or home loans, which are secured by the asset being purchased, personal loans are usually unsecured, meaning they don't require collateral. You receive a lump sum of money upfront and repay it over time with interest, typically in fixed monthly installments.

    Key features

    • There are no restrictions on how the funds are used. Once you get the amount, you can utilize it. However you want (go on a fancy vacation or finance your dream wedding), unlike other loans like a car loan or home loan, which are meant to be used for a defined purpose.
    • A personal loan is an unsecured loan, which means you don’t keep any collateral as a security against the money borrowed.
    • Generally, unsecured loans, like personal loans, attract higher interest rates than compared to secured loans.
    • Personal loans are usually fixed-rate installment loans with a pre-decided term, like 1-year, 3-years, 5-years, and regular monthly payments.

    Personal loan or car loan

    Pros and cons of using a personal loan for financing your car

    PROS

    CONS

    The most exciting thing about using a personal loan to finance your car is that you are free to choose any make and model since you will be paying for the car in full from the loan amount.

    One of the biggest downsides of a personal loan is that it attracts a high-interest rate because it is unsecured.

    You are most likely to get great discounts, offers, and freebies if you pay the full amount in cash.

    Your creditworthiness plays a huge role in getting a personal loan. A strong credit score is imperative, as a lackluster one can result in a swift denial.

    Most lenders offer flexible repayment terms for personal loans, ranging from 12 to 60 months.  

    It’s harder to get approval for a personal loan than a car loan. There’s a lot of scrutiny involved, along with a strong background check. One small miss, and your application can get rejected.

    There’s no need to make a down payment. The entire car cost can be paid in totality.

    A personal loan requires much documentation compared to a car loan.

    Car loans

    A car loan, also known as a vehicle or auto loan, is a specialized loan wherein the borrower receives money from a lender, like a bank or credit union, to pay for the car. The loan is secured, and the car acts as the collateral. So, if payments are missed, the lender can take possession of the vehicle. Car loans usually have a fixed interest rate and a repayment schedule, requiring regular monthly payments until the loan is fully paid off. This type of loan allows people to purchase a car without paying the entire amount upfront, ultimately making car ownership more feasible.

    Personal loan or car loan

    Key features

    • It's a secured loan backed by the vehicle itself, serving as collateral.
    • The loan amount is directly transferred to the dealer/seller’s account. This disbursed amount can only be used to finance the chosen car.
    • The interest rate for car loans is on the lower side, generally ranging between 9.5% to 11.5% (effective interest rate)
    • Most car loans are designed for new cars; however, one can opt for a car loan for a used car as well, depending upon the make and model of the car. Please note that car loans for used cars attract a higher interest rate than new car loans.
    • You have to pay the down payment, which is 20-30% of the car's cost, out of your own pocket. The lender covers the rest. No lender covers 100% of the car's price.

    Pros and cons of using a car loan for financing your car

    Pros

    Cons

    A car loan offers a lower interest rate as compared to a personal loan. 

    You don’t get the title of your own car until you make the last payment.

    It is much simpler to avail of than a personal loan. A mediocre credit score will also be enough to opt for a car loan.

    It does not cover 100% of the car cost. You have to pay a down payment of 20-30% of the car cost.

    You don't need to run to a bank for a car loan. It is readily available at dealerships as well.

    You cannot use a car loan for anything other than buying the specific make and model you have applied.

    The documentation could be more exhaustive in comparison to a personal loan.

     

    Factors to consider when choosing between personal loan and car loan

    1. Interest rates: Personal loans typically have higher interest rates than car loans. Since car loans are secured by the vehicle itself, they generally offer lower interest rates. Consider the total cost over the loan term to determine which option saves you more money in interest payments.
    2. Loan term: Personal loans often have shorter terms than car loans. A shorter loan term means higher monthly payments but less interest paid overall. Conversely, car loans typically offer longer terms, spreading out the payments and potentially reducing monthly expenses, albeit with higher interest costs in the long run.
      Personal loan or car loan
    3. Purpose of the loan: If you need funds specifically to purchase a car, a car loan may be more suitable due to potential lower interest rates and specialized terms. However, if you require funds for various purposes beyond buying a car, a personal loan offers flexibility as you can use it for any expense.
    4. Credit score: Your credit score influences the interest rates and terms you're eligible for. Generally, individuals with higher credit scores receive better loan terms. If you have a strong credit score, you might qualify for favorable rates on either type of loan. However, if your credit score is lower, you may face higher interest rates or stricter terms, making one option more advantageous.
    5. Collateral: Car loans are secured by the vehicle itself, meaning the lender can repossess the car if you default on payments. This reduces the lender's risk, often resulting in lower interest rates. Personal loans are typically unsecured, meaning they don't require collateral. If you're unable to repay a personal loan, there's no specific asset for the lender to seize. However, this higher risk for the lender usually translates to higher interest rates for you as the borrower.

    Generally, it's more advantageous to opt for a car loan as they offer lower interest rates than personal loans. Ultimately, lower interest rates mean more savings in the long run. However, if you manage to get a personal loan with a lower interest rate than an auto loan, then that may be the way to go. The bottom line is always do your research and weigh your options before making a decision.

    Also Read: How to budget for your car loan repayment effectively

     

    Read All

    Featured Articles

    Recommended Articles For You

    Read All

    Featured Cars

    • Upcoming

    Car Articles From Zigwheels

    • News
    • Article Feature
    • Advisory Stories
    • Road Test
    • Toyota Financial Services PH wins top honor in global kaizen event
      Toyota Financial Services PH wins top honor in global kaizen event
      Ruben Manahan IV . Today
    • VinFast enters PH EV arena
      VinFast enters PH EV arena
      Ruben Manahan IV . May 21, 2024
    • Hyundai Center in Singapore to open restaurant run by 3-Michelin-Star chef
      Hyundai Center in Singapore to open restaurant run by 3-Michelin-Star chef
      Paulo Papa . May 21, 2024
    • 1,605 motorists nabbed for violating EDSA Busway rule: DOTr-SAICT
      1,605 motorists nabbed for violating EDSA Busway rule: DOTr-SAICT
      Paulo Papa . May 21, 2024
    • Geely showcases 1-car-per-minute Changxing factory
      Geely showcases 1-car-per-minute Changxing factory
      Paulo Papa . May 21, 2024
    • Cabin check: here’s what’s inside the Toyota Corolla Cross
      Cabin check: here’s what’s inside the Toyota Corolla Cross
      Paulo Papa . May 21, 2024
    • Toyota Corolla Cross vs. the competition
      Toyota Corolla Cross vs. the competition
      Paulo Papa . May 21, 2024
    • Geely GX3 Pro vs. the competition
      Geely GX3 Pro vs. the competition
      Paulo Papa . May 14, 2024
    • Here are the PH-market Toyota Corolla Cross's colors
      Here are the PH-market Toyota Corolla Cross's colors
      Paulo Papa . May 13, 2024
    • Which is the better choice: Toyota Corolla Cross or Yaris Cross?
      Which is the better choice: Toyota Corolla Cross or Yaris Cross?
      Paulo Papa . Apr 22, 2024
    • Here are some ideal destinations and safety tips for the upcoming Holy Week
      Here are some ideal destinations and safety tips for the upcoming Holy Week
      Paulo Papa . Mar 08, 2024
    • Here are some New Year’s resolutions for car owners
      Here are some New Year’s resolutions for car owners
      Paulo Papa . Jan 03, 2024
    • PH auto market: 2023 in retrospect
      PH auto market: 2023 in retrospect
      Paulo Papa . Dec 15, 2023
    • Here’s a holiday gift guide for car enthusiasts
      Here’s a holiday gift guide for car enthusiasts
      Hazel Nicole Carreon . Dec 15, 2023
    • Oil players cut pump prices anew
      Oil players cut pump prices anew
      Paulo Papa . Nov 14, 2023
    • Sensational 7-seater: Honda BR-V V
      Sensational 7-seater: Honda BR-V V
      Paulo Papa . May 20, 2024
    • Style made affordable: Jetour Dashing
      Style made affordable: Jetour Dashing
      Ruben Manahan IV . May 14, 2024
    • Compelling crossover: Geely GX3 Pro Comfort
      Compelling crossover: Geely GX3 Pro Comfort
      Paulo Papa . May 13, 2024
    • Staying cool: Geely Coolray Sport
      Staying cool: Geely Coolray Sport
      Paulo Papa . May 03, 2024
    • Radical cut: GAC GS3 Emzoom R-Style
      Radical cut: GAC GS3 Emzoom R-Style
      Ruben Manahan IV . Apr 30, 2024