In the last couple of years, the number of leased cars reached an all-time high, meaning that there were fewer people buying with cash. Since times are tight for lots of car buyers, it’s no surprise that people are looking at the pros and cons of personal loans.
Since they have so many potential costs and benefits, navigating the whole issue requires some help.
Here are five things to know about personal loans before you get your next vehicle.
1. Personal Loans Can Consolidate Debt
By getting a personal loan to pay for your car, you get the chance to consolidate a diverse group of debts to ensure you only make one payment.
Rather than having your personal loan be just for your car, you can get a larger one that includes money for you to use for your car. This is an alternative that actually leads to getting you out of debt.
With the wide range of interest rates you might be paying, you may have debts that are far more expensive than others. If this is the case, consolidating all of your debts ensures that you get a better rate in the end. A personal loan might cost you less in the end.
Make sober decisions about your own finances and how much you can bear before you make any big decisions about your financial future. If you’ve got a lot of debt to worry about, let your personal loan be a benefit rather than an albatross.
2. Check Monthly Payments
If you’re thinking about whether or not to get a personal loan for a car, you need to break down the costs as they pertain to you. Every financial institution is going to offer you a different amount of credit they’re willing to give. They’re also going to give you a different amount of interest that other institutions might be able to beat.
If you find that you’re already paying too much and about to drive deeper in debt, stop and consider why you got there in the first place. No matter how deep you are or whether you don’t feel like you’re in debt at all, the math doesn’t lie. If you can’t afford basic necessities after taking on a new monthly payment, you need to find an alternative.
If the rate that you’ll be paying per month doesn’t fit within your budget, you might have to consider another route. Another monthly bill when you’re already struggling with debt is too much to bear. If you take it on, you’ll risk going under and having to claim bankruptcy.
3. Can Your Rainy Day Fund Help?
If you take out a personal loan and you fall behind on your payments, you’ll incur all kinds of fees. You could even lose your car depending on the situation. All of that work and all of that stress will be for nothing if you end up losing the one thing that you worked so hard to get.
Make sure you have a rainy day fund. While it might not be feasible to meet that minimum of six months of expenses, it’s essential to have at least enough to pay for a month of your bills. When you have this fund, you’re operating on a financial tightrope without a net.
Everyone deserves to have a net, so build one for yourself.
If you want to avoid taking out any personal loans at all, you can use part of your rainy day fund to cut off how much you’re spending on the car. When you lower the overall cost of the car and apply your rainy day fund to the sticker price, you’re less likely to end up behind the eight ball.
While no one plans to lose their job, we should all plan to stay afloat if the rug is pulled out from underneath us. When you have a robust rainy day emergency fund, you can either pay for the car in part or ensure that the monthly payment is completely covered.
4. Consider Your Credit Score
If you haven’t been working hard to get a good credit score over the last few years, you’re going to struggle with a personal loan. To qualify, you need to have a score that’s at least in the 600 range. If your score is worse than this or if you have no credit history, you might not qualify.
While your credit score isn’t the only thing that potential lenders look at, it certainly is valuable. It shows how often you’ve been trusted with this kind of money and how likely you are to spend it wisely. If you’re not able to pay bills on time, your credit score will show that.
Auto loans have lower requirements than other types of credit because the car is your collateral. However, your score still matters a lot.
5. Look At The Interest Rate
As stated above, the vehicle itself helps to secure the loan you’re trying to get. Since that’s the case, straightforward auto loans usually have a low-interest rate.
If you’re looking for a personal loan for reasons of lower credit, or because you want to consolidate with one company, be prepared to pay more. If you can offer some type of collateral, you may be able to lower the rate.
If you’ve built up good credit, talk to the dealer and you could get a rate with 0% APR. While this isn’t available everywhere, so many dealers offer it, that it’s become something many dealers have to compete with having.
Pros and Cons of Personal Loans Are About You
The pros and cons of personal loans for buying a car are, well, very personal. They depend on your credit history, how good you are with money, how good you’ll be in the future and lots of other matters. If you’re not sure whether you can pay a loan back, don’t ever take one out.
If you’re deciding between leasing a financing, check out our guide for more info.