Personal Loan vs Car Finance – what is the difference?
Finding the money to buy a new or used car is one of the hardest, most frustrating parts of upgrading your lifestyle. With vehicle values being as high as they are, this becomes a rather important aspect of your financial stability. Find out which payment method is the best.
Unless you're part of the 1% that can afford to go out and pay for a car with cash, you'll be needing to find a way to finance the vehicle that you have your eye on. A car will possibly be the second most expensive purchase you ever make, only beaten by your house.
Related: Paying for a car - cash, finance, or personal loan?
You may be inundated with SMS' and emails offering you amazing deals on a personal loan. Deals so good that you may even consider taking one out to finance your next car but before you do that, there are a few things that you need to know.
Personal loans
Personal loans are not a very effective way of financing a vehicle. Generally speaking, there are two kinds of loans; one that is secured and one that is unsecured.
Secured loans leverage the value of something you already own against the loan as a guarantee that the financial institution (banks or otherwise) is able to get their money back in the event that you default on your loan. Defaulting implies that you are no longer able to pay back the money you loaned. Should you default on a secured loan, the institution is able to seize the item/s you listed as collateral for the loan in order to recuperate the money owed to them.
Unsecured loans are the second type. These loans typically have a higher interest rate than secured loans and the amount that you will be able to qualify for is considerably less than that of a secured loan. It's through this increased interest rate that the institution is able to safeguard its investment in you. Should you happen to default on an unsecured loan, the institution has the right to pursue legal action not only limited to blacklisting you. This will make it almost impossible to open another account or take out another loan in the future.
Personal loans as a whole have a rather high interest rate, be they secured or unsecured.
Vehicle finance
Car finance agreements remain one of the best forms of financing. There are very few finance agreements that offer interest rates as low as the one you are able to get from a vehicle finance deal.
Depending on your credit score and individual risk profile, you may qualify for an interest rate close to the prime lending rate as laid out by the Monetary Policy Committee in South Africa. With a healthy score, you can qualify for a figure less than prime, but most will qualify for a lending rate of prime plus, typically around 12% at the end of the day.
The vehicle you are purchasing forms the collateral leveraged in this agreement and if you default on the agreement, the bank has the right to take back the vehicle to sell and recuperate costs. It's only once the vehicle is paid up that you become the rightful owner of the vehicle. Until such time, the vehicle is registered in the bank's name via proxies.
