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  • Personal Loan vs Car Loan

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  • The amount of people opting for a personal loan has been on the rise in recent times. Many have started to look at personal loans as a viable option to fund some of the big purchases.

    Personal loan is an unsecured loan provided to an individual either by a bank or non-banking financial company in order to satisfy their financial needs. The personal loan amount offered will depend on a number of factors such as the income level, employment history, and credit history of the applicant.

    Car loans on the other hand are loans that have been availed specifically to aid with the payment for the car. Many of the car loan options offer to cover up to 80% of the total cost of the vehicle. The remaining 20% of the cost of the vehicle will have to borne by you.

    The biggest difference between a personal loan and a car loan is the lack of requirement of an asset to avail the loan. It means you do not require collateral in the form of property or gold to avail the loan. Unlike car loan and many other types of loans, a default with the repayment of the loan will not result in the auction what you own.

    The important point to note is the interest rate of the two types of loans. The interest rate for a personal loan is generally much higher than that of a car loan due to high amount of risk involved. It is also because personal loans do not require any collateral. The lender does not have anything you own that they can auction to get back the money.

    There might be a situation where you might not have the funds to pay the remaining 20% of the cost of the car. In these cases, opting for a personal loan might be a good option as you will be able to get the entire amount at once. Is it really the wisest option to opt for a personal loan to buy a car?

    Is it good to choose a personal loan to buy a car?

    There are lot of factors that you have to consider before choosing either a personal loan or a car loan to finance your car purchase. Listed below are some of the important points that you should consider before choosing one of these options:

    • Loan Amount and Rate of Interest offered – As mentioned earlier, personal loans generally have a much higher interest when compared to car loans. The total amount of interest you will have to pay for the personal loan or the car loan is determined mainly by your credit rating and credit score.
    • It is generally advised to opt for a personal loan if you have a good credit rating and opt for a car loan if you have a poor credit rating. Since a car loan generally covers only 80% of the total cost of the vehicle, the remaining 20% can become a big amount if the cost of the car is higher. A personal loan on the other hand will provide you the entire 100% of the total amount you need to purchase the car. A good credit rating will ensure that you get a personal loan that covers the entire car cost at a reasonable rate of interest.

      In case you have a bad credit rating, it is advisable to opt for a car loan. This is because car loans involve a much lower amount of risk because of the presence of a collateral. Because of this collateral, lenders generally do not have a big problem when it comes to availing car loans. The general rate of interest offered when it comes to car loans ranges between 8.5% to around 14% while personal loan interest rates can easily go up to 20% and sometimes even more.

    • Purpose of availing the loan – It is to be noted that a car loan cannot be used to purchase anything else other than the car using the borrowed amount. A personal loan availed can be used to buy the car and can be spent on any expenses you desire. If you other expenses that you will have to handle other than the car expense, it is better to opt for a personal loan.
    • Tenure of the loan – The tenure for both the types of loans is very different. The tenure for a personal loan ranges between 1 year and 5 years while the tenure of a car loan ranges between 3 years and 8 years. Both of these options have their own pros and cons. A shorter loan tenure will mean that you will be paying a lower amount of interest for the availed. The short tenure however means that the amount to be paid as EMI will be much larger.
    • Everyone wishes to get the loan repayment finished as soon as possible. If you have the repayment capacity to make hefty EMI payments, you can avail a personal loan with a shorter tenure. Car loans on the other hand have a lower rate of interest and a longer tenure. The only thing to consider in a longer tenure is the total amount you will have to pay as interest.

    • Ownership of the vehicle – If you are opting for a personal loan to buy a car, the biggest difference when compared to a car loan is the ownership of the vehicle. Since car loans are secured loans, the ownership of the vehicle will be transferred to you only after the completion of the loan tenure. Choosing a personal loan will provide the ownership of the car immediately as soon as you purchase the car. This and the lack of down-payment when it comes to a personal loan makes it an interesting option to consider.
    • Procedure for availing personal loans and car loans – It is generally much harder to get the approval for availing a personal loan than a car loan because of the absence of a collateral. Applying a personal loan with a bad credit score will attract very high interest rates or can also result in the rejection of the application. Car loans on the other hand can be easily availed irrespective of the credit score because of the presence of a collateral.
    • The procedure to avail personal loans and car loans have become a lot easier in recent times. With the constant increase in the number of lenders available in the form of banks and non-banking financial companies, availing loans has become a simple process. You might require a lot of documents for getting a personal loan approval.

    The choice to either pick a personal loan or car loan to finance your car purchase should be evaluated by taking into consideration factors such as loan tenure, principal amount, EMI amount, and the amount of interest you wish to pay during the loan tenure. Personal loans can be a good option if you wish to finish the loan tenure soon with minimal amount paid as interest. Car loans can be a good choice if you cannot pay a high EMI payment every month and wish to repay the loan amount over a longer period. Check the different banks and non-banking financial companies and compare all the options available before making a decision.

        

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