Personal car loans: are they as cheap as suggested?

Personal loans are considered the most economical modus operandi for purchasing a car among car finance options. They are available from direct lenders and traditional financial institutions. They work as standard personal loans that come with extended repayment lengths.

Every month, a fixed instalment amount of money is paid, reducing the size of the debt, and until the loan is completely discharged, you cannot claim the title of the car. In other words, personal car loans are secured against the car you use.

The repayment length of a car loan could be between one and five years, depending on the borrowing amount and your overall financial condition. Credit rating is the main determinant of interest, and they are inversely proportional to each other.

While no additional collateral is required, your car will serve the purpose of security. You will be completely free to drive your car the way you want, with no strings attached, but the title of the car will remain with the lender, which is transferred to you only after the full and final settlement of the loan.

How do personal car loans work, and how are they cheaper from financing from dealers?

Car dealers provide hire purchases and personal contract purchases. The former works the same as a car loan from a direct lender. You will be required to make an upfront payment of about 10% of the total value of your car. Every month you will be allowed to pay a fixed sum of money towards the debt. Once the last instalment is paid, you will receive the title of the car.

Hire purchase and personal loans work the same way, but car dealers usually charge a slightly higher interest rate. Because the annual percentage rate includes fees and other charges along with interest rates, you will most likely find yourself paying much more than personal loans by choosing a hire purchase contract.

Personal contract purchase is completely different. It provides protection against depreciation. At the end of the term, you will not own the car unless you make the balloon payment. The upfront payment is normally 10%, but in some cases, it can go up to 15%. Personal contract purchase is the most expensive deal, especially if you are looking to own the car at the end of the contract because you must have already paid more than half of the value of the car throughout the loan agreement.

Further, even if you do not feel inclined to purchase a car at the end of the contract, you will be charged additional fees and penalties if you have gone past the recommended miles. There are certain conditions that must be met in order to avoid extra charges.

Compared to hire purchase and personal contract purchase, the most affordable method to fund your car is personal car loans in Ireland. What do you need to qualify for these loans?

• You must have a decent credit report. A good credit rating ensures qualification of lower interest rates. In case you have a bad credit rating, not only will you be charged high interest rates, but you will also have to pay a larger deposit, usually 20%.

• Your financial condition must be strong. Car loans are paid off over a long period of time. Despite changes in financial circumstances, you must be able to keep up with payments. Lenders may want you to have a backup plan. An alternative repayment plan mitigates the risk of default when the financial situation is turned upside down.

Here is how car personal loans work:

• You will make the payment in monthly instalments

Every month, you will pay down a fixed instalment, which goes towards both the principal and the interest, reducing the total amount of the debt over time. The number of monthly instalments hinges on the repayment length. The longer the term, the lower the size of the monthly instalment will be, but you will end up paying a lot more interest in total.

• You will pay annual percentage rate

The annual percentage rate and interest rate are not the same. Annual percentage rates are always higher than interest rates because they include fees and other processing charges. Annual rates signify the annual cost of the debt. It is vital to pay heed to them while comparing deals. Annual rates will be much higher in case of a poor credit rating, even if you arrange a larger deposit.

• You will end up with early repayment fees because of early settlement

Most car loan providers will not permit you to repay the debt before the scheduled time. If you try to settle your debt before then, you will be charged early repayment fees. Lenders charge early settlement fees in order to mitigate the loss of interest. You should carefully estimate that early settlement helps you save money despite early repayment charges. If not, you should continue to stick to your existing repayment plan.

Pros and cons of using personal car loans

Here are the pros and cons of using personal car loans:

• One of the benefits of using personal car loans is that you are free to use the car the way you want.

• Flexible payment plans are offered. Your income sources are perused to ensure that you do not struggle with payments. The repayment term could be up to five years, depending on your affordability.

• It helps boost your credit score if you make payments on time.

• The title of the car cannot be transferred to you unless you settle the whole car.

• Interest rates will be quite high especially if your credit score is bad.

• In case of a bad credit rating, you will have to make a higher upfront payment.

The bottom line

Personal car loans are much more affordable than car financing from car dealers. However, you still need a good credit score, great income sources, and a large down payment. The lower the loan value, the more affordable the deal will be. Compare annual percentage rates, so you do not end up paying hefty interest charges.