If you’re considering buying a car with financing, chances are your first inclination will be to apply for an auto loan. However, this is not the only type of loan that can give you the funding you need.
Many people don’t realize it, but you can also use a personal loan to buy a car. Here are five reasons why this could be a great and viable strategy.
1. No Collateral Required
With an auto loan, the vehicle serves as collateral. Collateral is something of value that the lender can seize if you default on your loan payments. In other words, if you can’t repay the borrowed money, the lender can legally take your car.
By contrast, an unsecured personal loan doesn’t require collateral. Instead, the creditor will review factors such as your:
- Credit score
- Credit history
- Debt to income ratio
- Employment history
If you default on a personal loan there are financial consequences but you won’t be putting ownership of the vehicle at immediate risk.
2. No Down Payment
With auto loans, lenders typically require a down payment. Down payments are a fairly common way for borrowers to demonstrate their interest in purchasing.
On the other hand, a personal loan doesn’t require a down payment because the borrower is applying for and expecting to receive 100% of the loan amount.
3. You Don’t Meet the Minimum Financing Amount
Some auto loan lenders have a minimum financing amount. For example, a lender may not approve a financing application for $10,000 or less. This affects people who are prepared to make a significant down payment and whose borrowing needs fall short of the lender’s minimum financing amount.
This is where an unsecured personal loan might help. Although some states and individual lenders have minimum loan values, you may want to consider taking out a personal loan.
4. Your Credit Score Doesn’t Qualify
Having a less-than-perfect credit score could pose challenges when seeking an auto loan. However, some lenders have more flexible eligibility criteria for personal loans, and approve those of various financial backgrounds. Collaborating with a lender that considers the applicant’s overall financial situation may enhance approval chances. It’s essential to note that applicants with lower creditworthiness may encounter higher Annual Percentage Rates (APRs) compared to their more creditworthy counterparts.
5. Buy The Car You Want
Some auto loan lenders may have requirements when it come to the type of car a borrower can buy. For example, if it’s a used vehicle and more than ten years old, your loan application may be denied because the lender determined the collateral value of the car was too low.
On the other hand, the decision to offer you an unsecured personal loan does not take into consideration the age or condition of the vehicle. Because it’s an unsecured loan, the lender won’t ask you for information about the vehicle. That means you can buy the vehicle you want if you find a great deal.
The Bottom Line
Although most people think auto loans are the primary way to get financing when they need to buy a vehicle, there are other options. An unsecured personal loan can be a great way to borrow without pledging the vehicle as collateral or being subject to a lender’s restrictions as to what you can buy. Plus, if you’ve had any financial trouble, you may find it easier to get a unsecured personal loan from a lender that reviews an applicant’s full financial picture rather than merely focusing on the FICO score.
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