Loan application

How is a car loan different from a personal loan

To begin answering the question posed in this article's title, let's use some deductive reasoning.

Premise #1: car loans are loans that are used to buy cars and cars alone.

Premise #2: personal loans are loans that are used for any commercial purpose.

Premise #3: cars are a form of commercial purchase.

Conclusion: therefore, car loans are a type of personal loan, but not all personal loans are car loans.

This is the primary distinction between car loans and personal loans (and unlike some deductive reasoning conclusions, it is correct). While a personal loan can be spent on a car, a car loan does not have anywhere close to the range of spending options that a personal loan does.

A shopper cannot borrow money from a car dealer and then turn around and spend it on a vacation. In fact, he or she probably can't even spend it on other cars. Very often, a car loan is a specific agreement that applies to one vehicle and one vehicle only. A personal loan would never be that restrictive. Here are some other ways in which the two can be compared.

Collateral

Collateral is an asset of value that can be offered up to a lender in the event that a borrower cannot repay his or her loan. A loan that includes collateral is considered secured, while one that doesn't is unsecured.

In the case of a car loan, it is somewhat likely that a lender will ask that the car itself be used as collateral. This way, it can be repossessed by the lender and ensure that the arrangement won't have resulted in a net loss. Car loans are almost always secured. This is just the nature of the market.

There is a much greater likelihood of getting an unsecured loan if it is a personal loan. Especially if a person has a good credit history, finding a lender to sign on to an unsecured loan shouldn't be all that difficult.

Deposit

The deposit, or rather, the down payment, is a critical part of most car financing agreements. It puts a significant sum of money in the lenders' hands immediately, which is always valuable from their perspective. It might also affect how the rest of the loan ends up being structured, since a large down payment could ease a lender's level of stinginess.

In that sense, car loans and personal loans differ greatly. Since the entire purpose of a personal loan is to give someone more money in the present, requiring that person to lay down a cash deposit negates the purpose of what the loan is actually accomplishing. Therefore, an individual who wants to buy a car—but doesn't have the immediate funds for a down payment—would be better off getting a personal loan than a car loan.

Repayment

Aside from the deposit factor, personal loans and car loans come with a pretty similar repayment model. Scheduled payments are made over a pre-determined period of time. There may or may not be an opportunity to accelerate or restructure payments after they have decided upon.

The major thing to note, and is one which applies to both sorts of loans, is whether the borrower is paying a fixed or variable interest rate. A fixed rate will stay the same over time, while a variable rate will be subject to market fluctuations that could fall in the borrower's favour or work against it.

Car loans tend to have a fixed rate structure. With personal loans, it is more up to the discretion of the lender and borrower.