Personal Loan vs. Car Loan - Know Difference & Choose the Best

According to data provided by the Reserve Bank of India, personal loans consisted of approximately 96 percent of non-food credit in the year 2018. It has skyrocketed to more than twice its share in incremental food credit in the previous two years. The sharp increase in borrowing in the form of personal loans is attributed to various reasons. One of the reasons for its popularity is the fact that personal loans are extremely borrower-friendly and facilitate easy access to collateral-free loans. But is opting for a personal loan the best way to finance the purchase of a new car?

The following factors can help you evaluate the pros and cons of a personal loan vs a car loan to help you shortlist the best option based on your requirements:

1. Rate of Interest

Personal loans are unsecured, and hence, the rate of interest offered is higher due to the high risk involved in lending. The payable rate of interest on a personal loan is determined by factors like your income, credit score etc. The higher your credit score, the greater are your chances of availing a loan amount of your choice at competitive rates of interest.

In case of car loans, the vehicle purchased acts as the collateral and failure on part of the borrower to repay the loan will result in the car being repossessed by the bank. The reduced risk in lending is transferred to the borrower in the form of lower rates of interest.

2. Loan Amount Offered

Select lending institutions allow you to borrow approximately 100 percent of the total ex-showroom price of the vehicle in the form of a personal loan provided you have a good credit score. A car loan allows you to borrow up to 80% of the vehicle. This is the reason why many people who avail a car loan also avail a personal loan to cover up the rest of the amount they need.

Must Read: Can I Avail A Personal Loan To Buy My Dream Car?

3. Loan Tenure

The repayment tenure for both types of loans is different. An instant personal loan allows you a repayment tenure of approximately 60 months whereas most lenders allow a tenure of up to seven years for a car loan. A longer repayment tenure allows you the luxury of smaller instalments, however, you will end up paying a higher amount of money in the form of interest. A shorter tenure will entail larger instalments and a lower amount as interest.

Opt for an option that allows you to continue paying the loan instalments without compromising on other financial commitments. We recommend using our online personal loan EMI calculator so that you can get an estimate of the optimum loan tenure you can opt for by checking the EMI you will have to pay for a given loan amount and interest rate.

4. Car Ownership

When you opt for a personal loan to purchase a car, the ownership is transferred to you immediately and cannot be repossessed by the bank. However, nonpayment of the loan will severely impact your credit score and impact your financial health in the long run.

A car loan, on the other hand, is a secured loan, and the ownership of the car is transferred to the owner once the loan is repaid. It can be repossessed by the bank to make good the amount payable by the borrower.

5. Purpose of the Loan

Personal loans can be availed of for any reason. Loan providers have not laid down any restrictions on the purpose of borrowing as long as the funds aren't used for an illegitimate purpose. A car loan can be used solely for the purpose for which it has been designed.

If you desire to club your car purchase with other expenses, a personal loan might be the right option for your requirements.

Must Read: How to Apply for a Personal Loan?

6. Ease of Loan Availability

Car loans are relatively easier to obtain because the car purchased acts as the collateral and reduces the risk of borrowing. Ensure that you work on developing a healthy credit score and ensure that all your personal loan documents are available to ensure that your loan is approved without much hassle.

The decision between a personal loan vs car loan is an important financial decision like any other and should be made only after careful deliberation. Whichever option you decide to opt for, make sure that the instalments are honored on time to ensure that you maintain a healthy credit score in the long run.