car-finance

Car finance or a car loan? Here’s the real difference

When you’re looking at buying a car, there’s more to the decision than tossing up between whether you like the red or the black better.

As well as all those car-specific choices, you’ll have a big one to make when paying for it: to use finance or a loan?

Although they sound similar, there are important differences.

What is car finance?

Dealer financing is when you borrow the money to purchase the car from the dealership where you buy it.

This can be a convenient option as it means you can sign up to make the purchase and organise the payment process all in the one visit. In some cases, you may also be able to attain a lower interest rate for the loan.

There are a few downsides to this option, however. For example, the car finance period is usually fixed at three or four years, and you’ll likely need a good credit score to secure the deal. Most importantly, there will be much less choice in your vehicle decision. You’ll be limited to the cars on offer at the dealership, and finance is often only available on certain vehicles.

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What is a car loan?

A car loan, on the other hand, is when you organise to borrow money from another financial institution, such as a bank.

In this case, one of the biggest perks is that you can use the funds to buy any car you want. Whether it’s a brand new set of wheels from a dealer or something small and second-hand, you won’t be restricted in your decision. Another bonus is that the loan period is usually much more flexible, so you can discuss paying the vehicle off over the space of just a year, or as much as seven years – or anything in between. Overall, the range of options with a lender is far greater than with a dealer, so you should be able to find a loan that best suits your needs and budget.

There may be some cases where the interest rate is higher than what you might find at a dealership, however you must also make sure with car finance there is no balloon payment at the end of the term with the dealer otherwise this may make the low interest rate irrelevant. Although this is the only real downside to a personal car loan.

If you’re unsure about how to go about comparing different loan options, try using a car repayment calculator to determine how long it will take to repay, and how much those payments will be.



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