It can be worthwhile to use a personal loan on a new car if it’s older than most options on the market but still in relatively good nick.
A personal loan is a type of unsecured credit. That means it isn’t tied to an asset, which is the case when you go the more traditional car finance route.
The one major drawback with a personal loan versus car finance is that the former generally has a higher interest rate as there is no asset the bank can repossess if you stop paying your monthly dues.
If you do miss payments, it will damage your credit score and lead to additional interest or penalties down the line.
That said, these loans do have their fair share of benefits.
For one, if your application for a personal loan is approved, the money is paid directly to you rather than the car dealership.
Insurance isn’t compulsory like it is when taking up car finance, and there are zero restrictions on the age, make, mileage, price, or condition of the car you want to buy.
Moreover, you can settle the amount borrowed at any time without being penalised, and you interest rate remains fixed during the entire contract, which isn’t always the case with cars that are financed.
You’ll also own the car from the get-go if you buy it with a personal loan.
If you finance your wheels, the bank remains the legal title holder until everything is paid off.
When a personal loan makes sense
According to finance house WesBank, the only scenario in which it makes more financial sense to use a personal loan than traditional finance is when you’re certain the benefits of a vehicle will outweigh the drawbacks of having to pay more for it.
For instance, you may have found a reliable 2010 model that has been extremely well kept by the previous owner, though due to its age, it doesn’t qualify for finance.
You know that it’s a good buy and that the car still has plenty of life left to give, in which case a personal loan could be the way to go.
“If an older pre-owned car in good condition could change your life for the better, weigh up the cost vs the benefit,” said WesBank.
“If the independence and empowerment that comes with owning your own car is worth the cost to you, especially if the alternative is not being able to buy a car at all, then a personal loan could be the right solution for you.”
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