You can buy a car with your own money, or on credit. There are two lending options – car equity loans and consumer loans. We’ll tell you what the difference is between loans, and which option may be more profitable when buying a new or used car.
What is the essence of a car loan?
An auto equity loan allows the borrower to buy a car and pay for it in stages. You come to the dealer, choose a new car, and enter into a loan agreement with the bank with which this car dealership works. Under the terms of this agreement, the bank transfers money to the car dealership, and you receive a car and a payment schedule, according to which you will have to repay the debt to the bank. Usually, to guarantee the repayment of the loan, the bank also issues a pledge on the car.
Advantages and disadvantages
Besides the fact that you immediately drive home in a brand-new car and will pay for it gradually, car loans have other advantages:
- You can take advantage of a special offer and get a discount on cars under government support programs.
- Car dealerships may offer a discount on auto insurance.
- Rates for targeted lending programs may be lower since the car will be under the bank’s encumbrance until the end of settlements under the agreement.
But there are also disadvantages due to which equity car loans are bad credit for some. As a rule, targeted car loans are issued only for new cars without mileage. If possible, buy a used car, then only a trade-in car from an official dealer, which greatly reduces the range of offers.
In addition, a targeted car loan imposes certain obligations: obtaining compulsory insurance and a ban on transactions with cars without the bank’s permission – until you repay the debt under the loan agreement, you will have to renew the policy every year and will not be able to sell the car quickly.
Differences between a car loan and a consumer loan
Usually, people go for a specific car and choose a car dealership rather than a bank. This is not entirely correct, since banks can give you money to buy a car in absolutely any dealership, and not in any specific one. This lending option is called consumer or non-targeted and allows you to get money for any purpose.
Here’s how a consumer car loan differs from equity auto loans:
Any amount. When you take out a car loan, the amount is equal to the value of the car. A cash loan for a car from the Bank can be issued for the maximum amount provided by the bank – you can choose a more expensive or cheaper car within the approved limit. Here, focus on your budget and the possibility of additional payments from accumulated funds.
- Free management of money. A non-targeted loan can be spent not only on a car but also on tuning, maintenance, renting a garage, and obtaining the same insurance. You receive money in cash at a bank branch or credited to a bank card, which will be delivered to you by courier, and you can spend the remainder after purchasing a car for completely other purposes, for example, on a vacation.
- Free choice of car. A consumer cash loan is suitable for buying a used car or a new car in a showroom. You can choose a car from any seller, find a model with the required configuration, or buy an inexpensive option second-hand.
- No insurance requirements. It is not necessary to take out insurance. You decide when and under what conditions to insure your car and are not required to do so before issuing a loan. But if the loan is targeted, you won’t be able to get it without simultaneously insuring the car. Even if you don’t plan to use the car right away because of vacation or winter, for example, you will have to buy insurance.
- There are no restrictions on the disposal of the car. Consumer lending does not require handing over the car as collateral to the bank. You can give it away or sell it at any time even before you finish paying off the loan.
What do you need to get a car loan?
To take out a classic car loan, you need to select a car and fill out an application. With targeted lending, the seller may ask for a down payment or advance. This is necessary to confirm the buyer’s reliability.
To take out a loan to buy a car from a bank, you just need to fill out an application online, get a preliminary decision, and only then choose a car. The application review period is up to 2 days, but usually, the decision comes via SMS instantly. The approval period is 30 days, you will have time to choose a car and compare all the sellers’ offers.
When is it profitable to take out a car loan?
Car loans are a convenient solution that allows you to pay off your car in stages. You do not need to save up for an advance or provide security – the bank issues loans for the purchase of a new or used car without collateral or guarantors.
Taking out a loan to buy a car will be profitable if:
- You don’t have the entire amount and want to buy a car now to fix the cost and not chase rising prices.
- You want to buy a new car instead of an old one, and you can use the support of the bank to calmly exchange the car without being left without a car.
- You have saved up a certain amount, but you also have other pressing issues: repairs, vacations, and children’s education. Take out a car loan and allocate the money to your main goals, paying them in small amounts every month.
An important advantage of car loans is the ability to manage payments. Sign a contract for a maximum period so that the monthly payment amount is minimal, and use partial early repayment when you have the opportunity to pay a little more on the loan. This way you will reduce the total amount of interest and be able to reduce the loan term or further reduce the monthly payment. In addition, the loan agreement can be completely closed ahead of schedule. For example, if you sell this car or receive a large premium.
