When financing cars, with record high car prices?

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Auto loans make more sense than personal loans when financing cars, with record high car prices

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Prices for both new and used cars have risen dramatically in the last year due to shortages and production shut downs during the pandemic. According to Kelly Blue Book, the average price Americans paid for new cars increased by $6,220 between 2021 and 2021. The average transaction price for a new car was $47,077 in December 2021.

You’re not the only one who can’t afford to spend that much upfront. According to Experian’s report, in 2021 the average amount that consumers borrowed was $37280 for new cars and $25909 for used vehicles. You can buy a car with financing. The loan is usually paid back over a specified time period, typically two to seven years.

There are differences between auto and personal loans

There are two options when it comes to financing a car purchase: auto loans or personal loans. You can get personal loans from credit unions, banks, and online lenders. There are many sources for auto loans, including dealers and manufacturers that offer financing in-house as well as credit unions and banks.

The most significant differences between these two types of loans are their intended uses, and whether they’re secured- or unsecured.

Madison Block, senior marketing communications associate at American Consumer Credit Counseling (a non-profit credit counseling agency), says that an auto loan is a secured loan because the vehicle is used as collateral. She explains that while some personal loans might have collateral, it is more common for personal loans not to have any.

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There are pros and cons to using an auto loan to finance a car

An auto loan is the best option for buying a car. They are usually more easy to get than a personal loan and may allow you to borrow more.

Griffin says that you may be able get lower rates, better terms or even a larger loan to purchase a car. A secured loan provides more security for the lender and is more open to taking on more risk.

Lower interest rates are common for auto loans. Experian found that the average interest rate on a new car loan was 4.5% in 2021. According to the Federal Reserve, however, personal loans had an average interest rate of 9.09% in the same timeframe.

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Pros

  • It is easier to get a loan
  • Lower interest rates are common
  • You may be eligible for special incentive programs

Cons

  • Possession risk
  • There are limitations on vehicles that are eligible
  • Usually, a down payment is required

There are pros and cons to using a personal loan to finance a car

Experian’s senior director of consumer education Rod Griffin says that while auto loans offer the most benefits for car buyers in most cases, personal loans can be a good option in some situations.

Pros

  • It is easier to get a loan
  • Lower interest rates are common
  • You may be eligible for special incentive programs

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Cons

  • Possession risk
  • There are limitations on vehicles that are eligible
  • Usually, a down payment is required