Car loans and home loans are two of the most significant loans people take out during their lives. This may mean that these two loans are alike for some people, but this isn’t accurate. Car loans are large loans, but home loans are even bigger loans, and the lender must take on a much greater amount of risk.
The following are the differences between a car loan and a home loan:
Lenders Scrutinize Credit Scores and History More for a Home Loan
The three credit bureaus maintain credit reports on every consumer, and before someone is approved for a home loan, lenders will pull all three of these reports. Any late payments, bankruptcies, or high credit card balances will determine the applicant is a high risk. In contrast, a lender for an applicant seeking an auto loan will only be interested in one of these reports. Therefore, it can be easier to be approved for an auto loan.
Negative Items on Credit Reports Hold More Weight
A credit report that contains several negative items will not lead the potential borrower to an approval for a home loan. For example, a chapter 13 bankruptcy remains on one’s credit report for seven years, and a chapter 7 bankruptcy remains for 10 years. However, lenders fail to approve home loans when bankruptcy is relatively recent. This is also a foreclosure case.
Auto lenders are less interested in bankruptcies because they are not loaning as much money. They may approve the loan, but they will charge higher interest rates, and the terms may not be as beneficial to the borrower.
The Tolerance of Risk
Auto loan lenders will agree to a higher risk than home loan lenders. This is because those in the auto industry want to sell more vehicles than lenders want to sell houses. Although auto loan lenders are more forgiving of negative items on a credit report, they cannot offer the borrower the lowest interest rates. That’s because they should protect themselves.
The Required Paperwork
Unfortunately, the paperwork required to obtain a home loan is the same amount required to obtain an auto loan. Both types of lenders require that potential borrowers provide bank account statements, tax returns and their most recent pay stubs. However, if applying for an auto loan, the potential borrower must present proof of auto insurance. If applying for a home loan, the potential borrower must present proof of home insurance.
What Is a Good Interest Rate for an Auto Loan?
According to Lantern Credit by SoFi, “The average auto loan interest rate is different for new cars and used cars.” In 2021, the average interest rate for a new car was equal to 3.86%, and the average interest rate for a used car was 8.21%.
After being preapproved for an auto loan, one great plan is to enter a car dealership. This may also entitle you to the lowest interest rate.
