If you have applied for car loans but been denied, you may be thinking of taking out a personal loan instead. Especially if you are not buying an expensive car, it may be easier to secure a personal loan simply because there are more lenders that offer them. (You can apply to several banks and cast a wider net.) But while a personal loan can be a viable way to purchase a car for many, these loans have their pros and cons. Here's a look.
Pro: You won't need to have the car "approved."
When you apply specifically for a car loan, many lenders want to know that the car is in a certain condition or worth a certain amount before they will lend to you. This is so that if you stop paying on the loan, they can repossess the car, sell it, and recoup the money they lent you.
A personal loan, on the other hand, is considered unsecured debt. In other words, there no specific asset tied to the loan. The bank won't have to approve the car you're buying or even know that you're using the money to buy a car. This makes a personal loan a good choice if you're buying a car from a friend or family member and know it has some problems/broken parts that would cause the bank to disapprove of a car loan.
Pro: There are loans available for those with low credit scores.
If your credit score is not great, you can typically still find lenders who are willing to give you a personal loan. Yes, you will pay a higher interest rate than someone with great credit, but you'll at least get the loan. Though there are lenders who give car loans to people with low credit scores, they are not as common—and sometimes work hand-in-hand with less-than-reputable car dealers.
Con: Rates fluctuate often.
The rates on personal loans are always changing. One day, you might be able to get a loan at 2.5%, and the next day, the bank may only offer 4%. When you don't need the loan urgently, you can wait a while, watch the rates, and take out the loan when they are down. But when using the money to buy a car, which you need pretty urgently, you may have to just accept a somewhat higher interest rate. Still, shopping around to several lenders can ensure you get the best rate possible at that time.