Buying a Car with a Personal Loan vs Car Loan: Things You Need to Know

About eight in every 10 Filipinos wanted a "simple and comfortable life," found the latest National Economic Development Authority (NEDA) survey. For 62% of those respondents, a simple and comfortable life means owning at least one car.^[1]

Purchasing a car of your own, whether brand new or second-hand, is a good investment. However, not all Filipinos can afford to buy a car. Aside from daily expenses, the car's monthly amortization, fuel, and maintenance costs all add up, and they’re not exactly cheap!

When buying a car, get the best financing option that’s easy, convenient, practical, and affordable. Which leads us to the question: should you go for a personal loan or a car loan? Here are the factors to consider when doing your personal loan vs car loan comparison.

What are the Differences Between Personal Loan vs Car Loan?

A personal loan can be secured or unsecured. The former is backed by assets you already own for the lender’s security, while the latter is determined solely on the basis of your credit status.

A car loan, on the other hand, is a type of loan structured to factor in the depreciation of a car’s value over time. Car loans often require you to make a sizable down payment early into the term―the bigger your deposit, the lower your succeeding monthly payments.

Depending on your agreement with the car dealership, you can actually negotiate your down payment. Some car dealers can reduce the required down payment and remove freebies instead.

At a glance, these two loan options seem similar because they both come with interest rates, monthly amortizations, processing fees, and required income documents. However, personal loans and car loans are different in terms of costs, payment terms, and conditions, just to name a few.

Personal Loan vs Car Loan: Pros and Cons

Before deciding on whether to take out a personal loan or a car loan, compare their advantages and disadvantages first, especially the interest rates and payment terms. Here's what you need to know about car loans.

Car Loan Pros	Car Loan Cons
Low-interest rates. Car loans are secured loans with the purchased vehicle serving as collateral.	Options for car model and type may be limited. You can only purchase a car based on the car loan amount you qualify for.
Easier and quicker application process. Most car retailers have representatives and in-house bank agents to assist in processing your application.	Limited loan tenor option. Most car loans should be fully paid off in 60 months.
Comes with freebies like car accessories. You may not have a discounted price for the car. But when you negotiate with the car dealer, you can get freebies like dashboard cameras, rain visors, and other car accessories.	May require a down payment. Some car dealers offer a very low down payment, but most banks require a down payment of at least 20% of the vehicle cost.

If you're planning to take out a personal loan to purchase a car, here are some important things to take note of as well:

Personal Loan Pros	Personal Loan Cons
Freedom to choose the car model and brand. You can choose the car model and brand that suits your cash on hand from the personal loan proceeds.	May come with higher interest. Most personal loans are unsecured, which means higher interest rates compared to secured loans like car loans.
No down payment required. Because you’re paying in cash, you don’t need to make any down payment.	Tedious application process. Applying for a personal loan may take longer compared to car loan applications. You may need to wait for up to 14 days to get your personal loan application approved.
Bigger discounts. Buying a car with a personal loan is like purchasing in cash. Most car retailers can provide discounts and freebies to customers who pay in cash.	You need to have a really good credit score to get a higher loan amount and the best interest rates. If you have bad credit, you won't get approved.
Flexible loan tenor. Most personal loans can be paid in 12 months up to 60 months, or more, depending on the lender.	The eligibility requirements for most personal loans are also more stringent.

Which is Better: Car Loan or Personal Loan? 5 Factors to Consider

When choosing between personal loan vs car loan, take these five considerations into account.

1. Payment Terms

You may be tempted to go for a longer loan tenor so you can have lower monthly payments. But a longer loan tenor means you pay more interest over time. This is true for both car loans and personal loans. Repayment periods for personal loans are usually up to 60 months, while some car loans can go up to 72 months.

Do you want to pay the same amount for the same vehicle for five years even when the “new car high” has long worn off? Or would you rather pay a higher monthly amortization and finish the loan at the quickest possible time? To help you decide, check out this sample computation using Security Bank’s car loan calculator for a 3-year and 5-year car loan.^[2]

Sample Computation for 3 Years (36 months)

personal loan vs car loan - sample car loan computation for 36 months

Sample Computation for 5 Years (60 months)

personal loan vs car loan - sample car loan computation for 60 months

You can see the difference in the monthly amortization and the total cost of the car loan as affected by the chosen payment term. For a 36-month payment term with a 20% down payment, the monthly amortization will be PHP 20,615.11.

The other computation is for a longer payment term of 60 months with the same 20% down payment. The monthly amortization will be PHP 13,773.87. It’s lower, yes. But if you multiply the monthly amortization by 60 months, you’ll find that you’ll pay a total of PHP 826,390.80 for a vehicle that costs PHP 800,000.

Read more:

2. Interest Rates

Interest is what you pay your lender in exchange for letting them finance your car and can make a huge difference in the ease of your payments.

The interest rates are calculated based on the car’s list price and your current financial situation. Personal loans tend to have higher interest rates than car loans but can be reduced in the case of secured loans. Whenever you can, opt for a loan with a simple interest scheme over compound interest.

Car loan interest rates also cover both add-on rates and effective rates. Add-on rate refers to the gross interest rate per year which is multiplied by the number of years covering your entire loan tenure.^[3] The effective interest rate is the true interest rate you’re paying based on the outstanding loan amount calculated after each principal repayment is deducted from your outstanding loan.^[4]

Below are the BPI Family Auto Loan Interest Rates^[5] you can use as a reference to compare add-on and effective interest rates.

personal loan vs car loan - BPI Family Auto Loan Interest Rates

3. New vs. Used Car

Most car loans are packaged especially for brand-new or Certified Pre-Owned (CPO) vehicles. When doing research on the car you wish to buy, always check which car loan alternatives are most applicable to your planned purchase.

When buying secondhand, work closely with the original owner to see if car loans are an option for your transaction. If you’re planning to buy a much older vehicle or if no dedicated car loan options are available, consider getting a personal loan.

4. Credit Score

If you choose to apply for a personal loan, lenders are likely look into your credit score rating. This is their assurance that you have the ability to make your payments on time.

Should you have a less-than-ideal credit score, you'll have better chances of getting a car loan than you would a personal loan. Either way, poor credit means you get saddled with a much higher interest rate. Ideally, you should settle as much of your outstanding credit debt as you can before you begin applying for any kind of loan.

5. The Repossession Question

You want to minimize the likelihood of defaulting on your loan. If you’re unable to make your payments, what happens after will depend on the loan you'll get. When you default on a car loan or a secured personal loan, the lender will seize your vehicle.

Applying for a secured personal loan gives you more options on what personal assets are at stake if you default, allowing you to keep your car. But whatever you do, do NOT put up your house as collateral in a secured personal loan for your vehicle.

No matter what kind of loan you apply for, it’s important to shop around for lenders with better rates or more flexible terms that work with your current income. If you can, make all your inquiries within a two-week period to prevent any further damage to your credit score. A car may be a huge commitment, but your wallet doesn’t have to suffer for it.

Personal Loan vs Car Loan: Important Questions to Ask

1. What kind of car do I want to buy?

Are you planning on getting a hatchback or sedan? Or is it an SUV for the family? The type of car you want to purchase is a factor when deciding between a personal loan vs car loan. Car loans can limit your options because banks will only approve a loan amount suitable to your credit score and current financial status.

2. Do I have the money to cover the down payment?

The down payment to purchase a car is usually 20% of the total price. Depending on how much the car is, your down payment can be PHP 100,000 or higher. If you have enough funds to cover this amount, then it’s wiser to pay off the down payment in cash and get more affordable car loan payments every month.

3. Can I afford the car loan monthly amortization?

The more expensive the car, the higher the monthly amortization. Before you get a car loan or a personal loan for your car purchase, make sure your income or salary can cover the monthly payments for the next three or five years.

4. What other fees and charges do I need to pay?

When you buy a car, you also need to pay the following:

Comprehensive Third Party Liability Insurance, which is around PHP 800 per year
Motor Insurance Premium, which is computed based on the purchase price and type of vehicle
Chattel Mortgage, which can be up to 3% of your loan amount

5. Do I have parking space for my car?

Before you buy a car, make sure you have parking space. If you live in a condo and don’t have a parking slot, renting a parking space in the metro can cost around PHP 700 up to PHP 2,000 per month, sometimes even higher. This is a significant amount to add to your monthly car ownership costs.

Final Thoughts

Personal loan vs car loan―what’s the verdict? Well, this really depends on your credit score, your income, and how long you want to pay off your car. Remember that a car purchase is a major financial responsibility that needs planning and preparation. Make sure that you can afford to pay it off before you get one.

Before parting with your hard-earned money, make sure to compare loans to get the best deal. You can find the best personal loan or car loan in the Philippines through Moneymax’s free online comparison tool.