We have a friend who buys his cars with personal loans instead of auto loans. Granted, he buys used cars. Very used cars, sometimes. Still, we pointed out to him that the interest rate would be lower if he had purchased the cars with an auto loan through his credit union. That’s when we got an education on why that might not be the better idea.
You see, our friend might pay a few extra dollars in interest, but it’s nothing compared to the amount he saves on auto insurance. By buying his cars with personal loans instead of auto loans, he is able to get away with driving on PLPD insurance. This saves him well over a hundred dollars per month. Needless to say, that’s a hell of a lot more than the extra interest he pays.
Of course, when you drive with PLPD insurance, you have to realize that you’re taking your chances. Regardless of what you did with your personal loans, the bank expects you to repay the loan. That’s the reason most banks will encourage you to use an auto loan to buy a car. The loan automatically has collateral (the car) and the driver carries full coverage insurance, so the loan will be paid off if the car is totaled.
Still, our friend pointed out, the odds of not being in a crash are in the driver’s favor. Every year, most drivers make it through the entire year without as much as a fender bender, much less a car totaling collision. By putting aside the difference between what you would be paying in full coverage insurance and what you pay for PLPD, you might be able to save enough to just buy the next used car outright. At the very least, you can save up a significant down payment.
Admittedly, this might not be the right way for everybody to buy a car. But if you’re in the market for an older car with a low Blue Book valuation, it just might be something worth considering. The combination of money saved on insurance and the freedom to sell the car while still paying on the loan, if you want to make buying your next used car with a personal loan an attractive option for many.
Photo via sfxeric