Difference Between Line of Credit and Car Loan

If you are looking for a new vehicle but lack the necessary funds to make an upfront purchase, you're probably thinking of securing additional funds to make that purchase. 

There are two choices in front of you now: either get a line of credit or a car loan.

Both types of loans need you to make consistent monthly payments over a fixed duration. However, it's essential to understand the distinct features and differences between these two types of financial products.

What is a personal line of credit?

A line of credit provides you with continuous access to a pool of funds that can be utilized and borrowed repeatedly according to your requirements. You get a set amount of flexible credit based on your credit history.

A credit line allows you to borrow funds as needed, with interest being charged only on the amount you've borrowed. The payments are typically made on a monthly basis, and as you repay what you've borrowed, your available credit is replenished, enabling you to use it again.

Advantages & disadvantages of financing a vehicle using a personal line of credit

Advantages: 

• Adaptable terms: You have the freedom to borrow up to your credit limit and the flexibility to customize your payment plan according to your preferences. Whether you want to make additional payments towards your principal balance or stick with interest-only payments, the choice is yours.
• Doesn’t require collateral: Most personal lines of credit are unsecured, eliminating the necessity to pledge any personal assets as collateral.

Disadvantages:

• High and fluctuating interest rates: Because there's no asset securing the loan, lenders often charge higher interest rates to compensate for the added risk of extending credit. Also, opting for a line of credit exposes you to the risk of interest rate fluctuations.
• Payment flexibility: The absence of a fixed payment plan may tempt you to make minimum payments, potentially hindering your ability to pay down the principal balance.

How is a car loan different from a line of credit?

A car loan is a specific type of installment loan structured for the sole purpose of financing the purchase of a vehicle, whether it's new or used. When you wish to buy a car but don’t have the full purchase amount upfront, you can secure a car loan from a financial institution or dealership. 

This loan provides a fixed sum of money for the vehicle's purchase, and you're obliged to make regular monthly payments over a set term until the loan is fully repaid. The vehicle being financed serves as collateral, meaning that the lender can repossess the car in case you default on your payments.

Read: Everything You Need To Know About Car Loans in Canada

Advantages & disadvantages of financing a vehicle using a car loan

Advantages:

• Favorable interest rates: When it comes to car loans, lenders typically offer lower interest rates compared to other credit options. This is because the loan is secured by the actual vehicle, which reduces the risk for the lender. 
• Fixed interest rate: Most car loans come with a fixed interest rate. This means you don't need to worry about the possibility of interest rates increasing and inflating your interest costs.
• Fixed payment plan: Car loans, being installment loans, maintain a steady monthly or bi-weekly payment schedule, enabling you to budget your expenses wisely.

Disadvantages:

• Your car as security: If you happen to miss payments or default on your car loan, your lender has the legal right to repossess and sell your vehicle to cover the unpaid debt.
• Substantial monthly payments: Opting for a car loan means you're covering the entire cost of the vehicle over several years. This can result in significant monthly or bi-weekly payments, which might strain your budget by consuming a substantial portion of your disposable income.

Which one is better for car financing? 

Your line of credit should be considered as a final option. It's advisable to tap into your line of credit only when it's absolutely needed.

Also note that with a line of credit, the bank has the authority to request full repayment at any time, with or without a specific reason. If you don't have the necessary funds to repay, they can exercise what's called their "Right to Offset."

Dealerships like Approval Genie offer many purchasing options, whether you intend to lease or finance, ensuring there's a buying solution to fit the needs of almost every individual.