If you’re looking to finance a car purchase, you’ll have many options for getting the advance you need to buy the vehicle you need. Even with bad or limited credit, there are many businesses looking to offer you money with differing terms, some better than others. One of the biggest choices you’ll have to make is if you want to take out a car loan vs line of credit—both of which have positives and negatives based on your credit history and financial needs.
Car Loan Vs Line of Credit: The Answer May Surprise You
What Is a Car Loan?
A car loan is an installment loan akin to those given for purchasing a house or opening a business, which provides a lump sum of money upfront and requires the borrower to pay it back in regular payments over a pre-determined period. The best loans are amortized, which locks in the monthly payment at the start and gives you a fixed monthly payment that takes the interest into account. Some loans are variable-rate, and the monthly payment and interest rate can vary, but those are common among less than prime lenders and should be avoided.
What Are the Common Reasons for a Loan?
Loans are a common choice for people looking to pay off a large one-time expense, especially for cars, homes, business openings, or higher education. As many need to take out a loan at a young age to pay for school, lenders will work with buyers with limited or poor credit. The large lender market is cause for caution, as anyone looking to borrow should investigate their lending agency closely and ask to see the terms before signing.
What Is a Line of Credit?
A line of credit is a private account of revolving funds that allows the borrower to make withdrawals, repay the funds, and use the money again as long as they stay within the terms and financial limits. The most common line of credit is a credit card, but for those who need a bigger limit or want an alternate funding source, there are other options. Home equity lines of credit and business credit lines also exist, tying your funding to standing assets to ensure repayment of the funds in case of default.
How Are the Terms of a Line of Credit Determined?
Your credit limit will be set by your current assets and your credit history, meaning it’s much easier to set up a line of credit than a loan with limited credit. The interest rate of a line of credit will be determined in negotiations, but people who pay off their monthly purchases promptly will pay very little in interest. Some lines of credit come interest-free for trusted borrowers.
The length of a line of credit will negotiated, with some lines being open-ended as long as you abide by the terms. Other lines of credit have a sunset clause that closes the account at a pre-set date. To avoid fees and penalties, and to keep your line of credit in good standing, paying off the months’ debts is critical.
Who Is Best Suited for a Car Loan?
Loans are best suited for large one-time purchases that are larger than your savings, such as a home, car, or opening a small business. As loans have a fixed interest rate, it’s easy to plan for paying off the loan long-term, and you won’t have any unpleasant surprises in the terms. As the loan company is putting money upfront, they’ll look closely at your credit history before lending a large sum.
Someone who doesn’t have a credit history will have a harder time getting a loan, because they’ll be seen as a risk with no record of repaying loans. Those people may need to put up additional collateral or take a loan at a higher interest rate.
Who Is Best Suited for a Line of Credit?
Lines of credit are best for clients who need regular sums of money to cover frequent purchases, but aren’t expecting a large purchase and have the budget to make regular payments on their monthly debts. Lines of credit depend on the market, and if they have interest rates attached, they’ll change over the life of the line. This is based on the prime interest rate according to the Wall Street Journal, so those interested in a line of credit should keep up on financial news or have someone to advise them.
With lines of credit, set your monthly spending limit above the maximum of what you expect to spend each month, to guarantee safety for unexpected events. This credit system is ideal for clients who have a good idea of their monthly budget and expect it to stay the same. Renegotiating your line of credit to increase the sum is an option once you’ve shown a steady history of payments.
Getting a Car Loan With Limited Credit? Here’s What You Need to Know.
Getting a car loan with bad or limited credit can be tricky, because you’re asking a company to place their faith that they’ll get their money back in you without a track record. The best way to boost your odds is by paying off any outstanding debts, and getting a credit card that you can use to make small purchases to pay off regularly, building a credit history. Loans for those with low credit are best attained with the help of a vehicle financing company that can weed out the predatory lenders who will try to trick you into bad terms.
Getting a Line of Credit With Limited Credit? Here’s What You Need to Know.
A line of credit for a car purchase is ideal for those looking to purchase a low-cost or used car, especially one that may need long-term maintenance or repair work. You start with a low sum and have an ongoing source of funds for the car’s long-term health as long as you consistently pay off your debts. As you’re asking for a small sum upfront and your lender will see your track record of paying it off immediately, lines of credit are easier to attain for those with low credit.
What Do I Need Before Applying?
The most important step when deciding between a car loan vs a line of credit is to understand your finances and the terms you’re signing up for. The ideal candidate for a loan or line of credit will have a steady income stream and solid assets to back up their loan. A client who walks into our offices with these will wind up pre-approved.
Before deciding on a car loan vs a line of credit, familiarize yourself with the terms of both and talk to people in your circle of friends who have experience. Knowing the experiences of those who have financed their vehicles this way can help you decide on the right choice for your finance needs.
Finance Your Vehicle With Ride Approval Today
Whether you’re looking for a car loan or line of credit, we take pride in working with clients who might be turned away from your average lender and finding a deal to get them into the vehicle they need. We pre-approve anyone who earns over $1800 a month and has been employed for three months, and we can help you pick between a car loan vs. line of credit. Contact Ride Approval in Edmonton, Alberta, for more details today.