Check if it pays to take a car or cash loan

Bank loans can be targeted or for any purpose. Cash loans can be used freely, but car loans must be used to buy a car, which will be indicated in the loan application. Let’s check if buying a car is better to use a car loan or cash. A summay is on

The essence of a car loan

car loan

As the name suggests, the car loan is to be used for the car, which will be indicated in the loan application and in the loan agreement signed with the bank. This loan belongs to the group of special-purpose loans which can be used only for their intended purpose.

Despite its name, a car loan can be used not only to buy a car but also to buy other motor vehicles, which include motorcycles, scooters, quads and even boats. It all depends on the individual credit policy applied in this respect by the bank where the loan is taken.

A car loan from a bank can finance the purchase of a new or used vehicle, although age is crucial. In many banks, it is not possible to buy a used car older than 8-10 years for a car loan.

There are three different types of car loans. These are loans:

  • standard – the loan is granted for the purchase of a car and repaid in monthly, principal and interest installments according to a previously agreed repayment schedule;
  • one-installment – repaid once by the customer at the end of the loan period, but they also require the borrower to make their own contribution; such loans are low-interest;
  • balloon – paid back under balloon installments, which are very low, but include, for example, 80 percent vehicle value, and the remainder of the car value must be repaid once.

Car loan

Car loan

The basic loan product in banks is a cash loan. Unlike a car loan, it is not a targeted product, so you can use it properly in any way. It is granted in an amount adequate to the amount requested by the borrower and to his creditworthiness. The bank does not know how the customer will use the loan, which is why you can make a commitment, e.g. to buy a used car and immediately to buy parts that will be necessary to repair it.

The cash loan is not secured, unlike car loans, where the repayment collateral is bought by the vehicle or the assignment of rights from the car AC insurance policy. Therefore, it will usually have a higher interest rate than specific loans, e.g. car loans.

What is worth choosing?

If you choose to finance your car purchase with a car or cash loan, you need to answer the question of which option will be financially more advantageous. When buying a new car, the choice seems simple – it is best to use a car loan, which can be arranged even through a car dealer.

Such a loan will be low-interest, and the customer will be able to use the car immediately. It will not require additional expenditure, for example, to replace the timing belt or operating fluids, which is usually a must in used cars.

Favorable parameters of the car loan result from the fact that it is a special-purpose secured loan. Banks can use several securities:

  • registered pledge,
  • transfer of ownership as security,
  • assignment of rights from the auto casco policy.

As a result, they bear lower credit risk, which is why they are willing to lower the interest rate on the liability.

A cash loan will be a good solution for a long-term car that cannot be the subject of a car loan in many banks. As part of such a loan, you can also obtain additional funds for any purpose. In addition, the cash loan does not enforce collateral on the car being bought, which means that the buyer can freely dispose of it and sell it whenever he wants. Unfortunately, cash loans are usually more expensive than car loans.

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