Deciding how to finance your next car purchase can be a challenging decision. The two main options are taking out a personal loan from your bank or accepting finance from the car dealership. There are pros and cons to each approach. This article examines the key factors to help you make the right choice for your situation when buying a new or used car.
The Interest Rates
A key consideration is the interest rate you will pay on the loan. Personal loans from banks typically have lower interest rates than finance from dealerships. This is because the dealership acts as a middleman and adds their own interest rate on top of the rate they receive from their lenders. Banks can offer lower rates directly.
However, dealerships sometimes run promotional financing with 0% interest deals or other incentives that could beat your bank’s rate. It’s important to compare the rates side-by-side while negotiating your purchase. Dealers may be willing to lower the finance rates further to win your business.
Flexibility of Loan Term
Personal loans allow you to choose your ideal loan repayment term, usually 1-5 years but can be longer. This gives you the flexibility to tailor repayments to your budget.
Dealership finance usually only offers set terms of 3-5 years. Whilst less flexible, these shorter terms mean you pay less interest overall versus a longer personal loan.
Ease of Application
Applying for finance at the dealership can be easier as they handle the application on your behalf. They also only do a soft credit check initially which doesn’t impact your credit score.
To take out a personal loan, you must research lenders yourself, fill out an application, and undergo a hard credit check which can temporarily lower your score. This extra effort may be worthwhile to access a lower interest rate.
Amount You Can Borrow
Personal loans allow you to borrow any amount up to your credit limit. This gives you flexibility if you need to borrow more or less than the price of your chosen car.
With dealership finance, you can only borrow the amount of your specific car purchase. Whilst limited, this does mean you cannot borrow more than you need, another option would be bridging loans, which offer flexible finance.
Used Car Considerations
Taking out a personal loan can make sense for used car purchases from a private seller when dealership finance is not an option.
Dealers selling used cars in Newcastle often offer competitive finance deals. This can make dealership finance a cost-effective option for used cars, but always compare interest rates against any personal loan offers.
To Sum it All Up
Weighing up personal loans versus dealership finance requires comparing interest rates, loan terms, application processes and borrowing amounts. Personal loans offer flexibility but require more effort to apply for. Dealership finance is easier to organise but has less flexibility. Review all options before deciding what works best for your next new or used car purchase.
