Should You Use a Personal Loan to Buy a Used Car?
Most of us live in places where we need a car to live. There are some cities, like New York City, where the public transportation system is amazing and the best mode of transit. It gets you where you want to go much faster than a car. Unfortunately, not all cities follow their lead. I live in a city where the public transportation system is seriously lacking. If I did not have a car, I would not be able to go anywhere. Most of us cannot afford to pay for a car in cash, so that means we need auto finance, usually in the form of a personal loan. Let’s dig a little deeper into what it means to get vehicle finance and if you really should.
What Is A Personal Loan?
A personal loan is when a lender of some type allows you to borrow a certain amount of money. You promise to repay the money in regular monthly increments for a set length of time. A personal loan has interest attached to it. Interest is what the lender charges you to borrow the money from them. The amount of interest is based on your credit score and other factors like income. A personal loan can be used for any purpose that you would like. There are some loans called out for special purposes, but in reality, you can use it as you choose.
Can I Use A Personal Loan to Buy A Car?
Yes, you get use a personal loan for just about any use. There are some personal loans specifically for purchasing cars. There is a major difference between a personal loan and an auto loan. An auto loan requires the borrower to use the vehicle as collateral. If you default on the loan, the lender can take possession of the car. A personal loan is an unsecured loan. That means, if you use a personal loan to buy a used car, the lender does not use the car as collateral. When you are buying a car from an individual, it makes sense to use a personal loan. If you do not want full coverage car insurance, you should get a personal loan instead of an auto loan. When using a loan to auto finance using a traditional auto dealer financing, the lender makes you have full coverage insurance.
Should I Buy A Car?
Obtaining a personal loan to buy a used car, or even a new car is a big deal. Cars are expensive and the cost only continues to rise. It is also expensive to maintain an older car that needs constant repair work. When considering if you should buy a car, there are some questions you should answer. Why do you want to purchase a car? Can you afford to purchase a car? I am going to focus on the first question here. We will talk about the second one further in the post.
In some cases, you need a car no matter what. Other times, maybe you just want something new, or you are tired of fixing your current car. The costs of car repair can easily creep into the thousands. Your current car may not even be worth the cost of the repairs. You really need to weigh the cost of the repair against the value, monetary and emotional, of the car. You should consider how often are you repairing the car. Is this a once every couple of years cost? Or are you sinking hundreds to thousands of dollars into it every few months? Only you can determine the best course of action but answering those questions can provide guidance.
What Are The Advantages To Getting A Loan to Pay For A Car?
There are some advantages to obtaining a personal loan to buy a used car. If you live in a place where public transportation is limited, you need a car. A loan can help you purchase a car when you do not have the cash. Let’s face it, few of us have the cash to pay for a car. If we did not take out a loan, we would not be able to afford a car. If you obtain a personal loan to pay for a car, you are not subjected to the same parameters as when you get an auto loan. When you get credit for a used car, the lender wants you to have full coverage auto insurance. You also must use the car you are purchasing as collateral.
What Are The Disadvantages To Getting A Loan to Pay For A Car?
So, let’s be honest here. The major disadvantage of a personal loan to buy a used car is more debt. Americans are drowning in auto and other debt and it continues to rise each year. The reality of a car is that as soon as you drive it off the car lot, the value goes down. With a few exceptions, cars do not retain value and will never be worth what you pay for them again. As mentioned above, they are expensive. Your loan payment could be anywhere from $300 to over $1000. That is a large chunk out of your budget. It may not be one you can afford. You may find yourself in a position of just buying the cheapest car you can afford. You may get stuck paying hundreds of dollars per month for a car you do not even like.
If I Do Not Pay Back My Loan, Can I Lose My Car?
When you use a personal loan to buy a used car, it is an unsecured loan. That means that you do not have to use your car as collateral. If you do not pay a personal loan, the lender will find ways to collect on the loan. However, they will not take your car as a result. If you obtain an auto loan, the car you purchase becomes collateral. That means, if you do not pay the loan, the lender had the right to take you a car. Believe me, they will. Lenders do not mess around when it comes to getting their money.
If you do not pay your bill, they will repossess your car. Often times, it happens in the middle of the night. If you know you are not able to pay the loan, the best thing to do is contact the lender and try to work with them to make different payment arrangements.
Does My Budget Really Matter?
Yes, your budget is one of the major factors in deciding on a personal loan to buy a used car. You need to be able to fit a personal loan into your budget before you decide to use one for anything. You should take a hard look at your budget to make sure a car payment fits. Considering to buy a car is not a decision that should be made lightly. If you cannot afford to pay the car payments each month, you are setting yourself up for failure.
You could lose the car. You could impact your credit. You may not be able to get another loan. That is a situation you do not want. The first thing you should do is use a budget app to determine how your finances look. Determine how much money you bring home each month and how much you pay out in expenses. The amount that is left is what you might be able to pay for a car payment.
How Can I Budget For A Car?
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Once you see your monthly expenses listed, you can begin to make adjustments. Often times, we do not even realize how much money we spend in a month until we write it down. Begin to eliminate unnecessary expenses, such as that gym membership that you are not using. You can also see some habits that you might be able to cut down. For example, do you eat out often? It can be expensive and when it is listed for you, you can see just how expensive. Perhaps, you decide to eat out only two nights instead of five. That could be a significant savings for you each month, without much impact. Look for other ways to reduce spending to hit your budget for a car. These savings could add up to the money to pay for a personal loan to buy a used car.
What Does My Credit Have To Do With It?
Your credit score has everything to do with it. Ultimately, it will decide how much you pay per month for a personal loan to buy a used car. Your credit score is an indicator to lenders about your credit worthiness. It also gives them insight as to whether or not you will pay back your loan. The lower your credit score is, the higher your interest will be. Interest is what a lender charges you to borrow money. When your credit is low, the lender feels it is risky to lend you money. They charge you a higher interest because they are taking a risk by lending you money.
Can I Improve My Credit?
It is possible to improve your credit score. It takes consistent and hard work. The first thing you need to do is make all of your payments in full and on time. Late or missed payments are the leading cause of bad credit. Start by making all payments on time. Then you need to begin to decrease the amount of debt you have. When you have a high amount of debt, it also decreases your credit score. You have a debt to income ratio. The higher your debt is by comparison to your income negatively impacts your credit score. Therefore, the more you are able to decrease your debt, the more positively it impacts your credit.
How Do I Know Which Loan Is Right For Me?
When you decide you want a personal loan to buy a used car, you should find the best one for you. To do that, you need to know how to shop for a car loan. It is helpful if you have some understanding of how a loan works to find the one for you. All lenders attach interest to any loan they give you. The interest rate changes from lender to lender, so you can look for the best interest rate for your needs. You can also look online for a loan. Online loans have an easier and faster application process. Often times, online lenders do tend to have a higher interest rate.
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Are There Other Options Besides A Personal Loan?
There are some options available to you besides obtaining a personal loan to buy a used car. You have the option to save the money to buy a car before you actually buy it. This allows you to have the money you need to buy the car without adding additional debt. You do not have to worry about making a monthly payment. This also means that you do not have to worry about not having the money to pay the loan. You could borrow money from family or friends. They may be able to loan you the money without having interest added. They may be able to offer you better loan terms which makes it easier to pay back.
The real question here is, should you buy a car? You are the only one who can answer that question. You need to understand that cars are expensive. No matter what route you go, you are going to put out a significant amount of money. However, most of us need cars to get through everyday life. We need transportation to get to work, school, appointments, and attending to basic needs like grocery shopping.
You may currently have a car that is sucking money in repair costs. That may not be the best way to spend that money. You may be able to get a car payment that is less than paying for constant repairs. You have to be smart with your car and loan shopping. Loans with high interest will cost you more in the long run, too. You need to take a look at your budget and make sure you can afford a car payment.
Taking on a car payment that you cannot afford sets you up for failure. You can hurt your credit. You can lose your car. You will lose a lot of money. Be honest with yourself and what you can afford before taking on another loan payment.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.