In this article, we set out the reasons to choose a personal loan over conventional vehicle finance and vice versa.
If you want to lend money to buy a car, a simple Google search will present you with a number of options… These fall into 2 main categories – vehicle finance or personal loans. So which is better?
If you suffer from attention-deficit disorder and can only read on for 2 more sentences, let me give you the quick answer:
- If you can get an offer for vehicle finance from a bank or dealership then, almost always, the “terms” will be more favourable (that is to say the monthly payments will be lower) than for a personal loan. Offers for vehicle finance will generally encompass better interest rates and longer durations, both of which will reduce your monthly premium.
- Lenders are fussy about to whom they would offer vehicle finance. They will technically “own” the car they finance so that will affect their consideration… This might mean that they decline your application for vehicle finance, but you might get approved for a personal loan. If you are buying an older vehicle with a low price tag, personal loans can be easier to get than asset finance.
If I can keep your attention for a couple of minutes longer, let me add a bit of explanation…
Why traditional car finance is better
The main reason that banks offer better rates for vehicle finance is that they have a “get out of jail free” card in the event that you fail to repay the loan. Because they legally own the car, if you stop paying your instalments, they will take back (repossess) the vehicle and resell it to pay off part of your debt. This means the loan is less risky for them, which is why you get a better deal (most of the time).
Also read: Should you arrange Vehicle Finance through a dealer?
The banks are less likely to offer you a finance deal on older cars. At this juncture, a personal loan may be a suitable option.
But it also explains why they get fussy about who (and what) they will approve for vehicle finance…
To put it simply: Banks don’t like financing purchases of older cars. In fact, vehicle financiers generally won’t finance cars that are 10 years old or older. Finance agreements generally last for 6 years, but when a car is 16 years old, there is not much point in repossessing it because it will be worth very little. Thus, they tend to either stay away from older cars or offer very poor deals.
Why consider a personal loan?
They are not as keen on the “budget end” of the market either. Most banks will say that they offer asset finance for cars priced as low as R30k, but in reality, they prefer “bankrolling” more expensive vehicles. When the price tag gets below R80k, they are not likely to be keen. Again, the value of the car means there is not much point in re-possessing it – so they either stay away or offer poor deals.
They take a long hard look at the price you are willing to pay for the car too. They will “own” the vehicle until the loan is paid off so they might not want to pay for any “extras” that you want to add to the deal, such as vehicle accessories or aftermarket (also known as bolt-on) warranties. Nobody will care about those extras once the car’s been repossessed, so the bank will lose money.
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With vehicle finance, when the banks get a little nervous, they will ask you to pay an upfront deposit on the car as part of the credit arrangement. Personal loan providers will not be as fussy, but they may charge you a higher interest rate.
If you’re looking to purchase an older model vehicle with a low price tag then securing a personal loan might be your solution. Bank asking for a deposit you can’t pay? Again, a personal loan could well work. However, you’re unlikely to secure a personal loan if you want to buy a car worth more than R150k. You can try, but generally, Asset Finance is the ticket you need for a more expensive “ride”.
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