Car Finance v Car Loan - A Quick Comparison

So you’re now contemplating purchasing a car on borrowed funds. Broadly the choices of finance available in such a situation are:

• Secured loan
• Unsecured loan
• Car Finance

A secured loan is available only to home owners. If you own a home and have excellent credit status, a secured car loan is the best option in terms of cost of finance (read interest costs). However, such borrowing often consumes considerable time as lenders need to go through a lot of steps before issuing the cheque in your name. These include credit checking, writing to your mortgage lender and gaining the approval and completing the formalities of second charge on the home etc. If you’re prepared to wait out, it’s still worth it.

If, however, you are in a hurry, the options left are an unsecured car loan and car finance. An unsecured loan, as the name implies, is given with no security. Implicit in such lending is the high risk. Lenders often charge very high interest on such loans. Depending on your credit status, this can vary, but as a rule the cheapest unsecured loan is more expensive than the most expensive secured loan. There are unsecured lenders like Welcome Finance who specialise in giving loans to those with poor credit history. So those with impaired credit history often go to such lenders and opt for unsecured car loans.

Between secured car loans and unsecured car loans lies car finance (car credit). Secured against the value of the vehicle, the interest rate of car finance is generally higher than secured loan but lower than unsecured loan. Interest rate, however, varies with the credit status of the individual. Other factors like employment status, marital status, annual income etc. too are considered while arriving at the loan amount and rate of interest. A car finance or car credit also has the following additional advantages which makes it a big draw with car buyers:

• Quick process
• Easier to obtain than a loan.
• Lenders offer incentives such as part exchange, cash back, free insurance etc. to make their offer more attractive.

Car finance or car credit is advised for people who satisfy one or more of the following:

• Home owners with bad credit or do not want to take on an additional liability on their home for whatever reasons.
• Tenants 
• Short of time

Irrespective of which option is suited for you, you’re advised to spend some time researching the market before deciding on which lender to go for. That will be time well spent.