Car Loan vs Personal Loan: Which Option Suits You Better
Owning a car in today’s world has become more of a necessity than just a status symbol. With people needing to travel long distances to work, a personal vehicle provides essential comfort and convenience.
When considering a purchase, selecting the right financing option is critical. Are you weighing a car loan versus a personal loan? The core of the decision is straightforward: carefully assess your financial health and the specific terms and conditions of each loan before committing.
You can enjoy the benefits of faster disbursals and zero collateral when you opt for a personal loan. On the other hand, a car loan requires you to pledge the vehicle document as collateral.
Still wondering how to choose between car finance vs personal loan? Find out here!
What is a Car Loan?
Before you opt for any form of credit, understanding its features is essential.
Definition and Purpose
This loan helps you purchase of a four-wheeler (new). Also referred to as an auto loan, this form of credit requires you to pledge the vehicle as collateral. Once approved, the lender pays the upfront cost to the dealer. You need to repay the entire loan amount, along with applicable interest, in monthly instalments over a specific tenure.
Suggested Read: Tips To Reduce Your Car Loan EMI
Features of Car Loans
When you opt for a car loan, most lenders approve up to 80–90% of the on-road price of the vehicle. However, some lenders may also offer 100% based on your credit score, pre-approved offers, income and other monthly obligations. For instance, Mahindra Finance offers up to 100% on the ex-showroom value of your car.
A credit score is a 3-digit numerical representation of your credit history. The higher the score, the easier your loan approval. The lender approves your loan based on specific parameters, such as the loan tenure and interest rate.
Loan tenure is the time period during which you need to repay the borrowed amount at an interest rate fixed by the financial institution. The repayment period varies from 1 to even 7 years, depending on the lender.
The interest rate is a percentage that a lender charges on the amount you borrow. This is decided based on your creditworthiness, income, and many other factors. As a rule of thumb, the higher the interest rate, the higher your borrowing cost and monthly instalment.
Remember, the financial institution approves your loan only after checking your eligibility. Each lender sets specific eligibility parameters in terms of age, income, creditworthiness, etc. For example, if you opt for a car loan from Mahindra Finance, you need to be at least 21 years of age.
Apart from this, make sure to submit the required documentation, such as:
- Identity proof (KYC documents)
- Income proof (Salary slips, IT returns, Form 16)
- Address proof
What is a Personal Loan?
A personal loan is unsecured credit, meaning you don’t have to pledge any asset as collateral. This financial product helps you manage unforeseen as well as planned expenses hassle-free. Whether you need to pay your children’s school fees or go on a vacation, a personal loan lets you use the funds with no restrictions.
This financial flexibility makes it a popular choice among borrowers. Here are a few other ways you can use a personal loan:
- Renovating your home to improve its overall aesthetics
- Upgrading your skills
- Managing wedding expenses
Features of Personal Loans
A personal loan does not have end-use restrictions. So, you can use the credit for any expense you want, including financing your car purchase. That said, the interest rate levied by the lender may be comparatively higher, mainly because it is an unsecured form of credit.
The lender fixes the rate based on the following parameters:
- Your income
- Loan amount
- Tenure
- Credit score
All you have to do is meet the eligibility parameters set by the lender. Then, choose a specific tenure in which you will repay the borrowed amount along with the interest levied.
Car Loan vs Personal Loan: The Key Differences
Now that you have a fair insight into these two forms of credit, here are some crucial points that will help you understand better.
Secured vs Unsecured
An auto or a car loan is a secured form of credit wherein the vehicle is pledged as collateral by the lender. In simple words, the ownership gets transferred to your name only after you repay the borrowed amount along with the interest levied.
This form of credit is beneficial for the lender as they have the entire rights on the collateral. In the case of a personal loan, which is an unsecured form of credit, you don’t have to pledge collateral. But the risk factor is higher in this case for lenders, as recovering the borrowed amount may be quite challenging.
Interest Rates and Loan Terms
A personal loan generally has a higher interest rate than a car loan and a shorter tenure while a car loan has a lower interest loan and a longer tenure. Most personal loans generally are capped at five years. Auto loans can go up to 7 years.
Flexibility and Use
A personal loan has no end-use restrictions. You can use it for any purpose. A car loan can only be used for buying a car.
Car Loan vs Personal Loan
| Parameter | Car Loan | Personal Loan |
| Type | A secured form of credit wherein you have to pledge the car as collateral | An unsecured form with zero collateral required |
| Usage | You can use the loan amount only for the purchase of a car | You can use the amount however you want with no end-use restrictions |
| Interest Rate | Comparatively lower than a personal loan owing to its secured nature | Higher interest rates levied as it is unsecured |
How to Choose the Right Loan for Your Needs
Choosing the right one between car loan vs personal loan involves a few essential factors.
Assess Your Financial Situation
This is an important factor to consider as your loan repayment depends on your budget. Once you analyse the financial situation, you can decide the amount you plan to borrow and the type of loan as well.
While a personal loan comes with higher interest rates, a car loan requires you to pledge the vehicle as collateral. Review your income and existing loan obligations, if any, before you apply for a car or a personal loan.
Compare Loan Offers
With financial institutions offering competitive loan terms, getting approval for a cost-effective option is no longer challenging. All you have to do is research online and evaluate the terms and conditions set by different lenders.
Then, approach the lender offering a favourable term based on your financial standing. Ensure that you also compare various lenders on the basis of Annual Percentage Rate or APR and other associated borrowing costs.
APR is a combination of the total interest rate along with the origination fee, which is calculated annually. Lenders include the origination fee, which is a one-time payment, to cover the costs of underwriting, processing and closing a loan.
Consider Long-Term Financial Goals
Before you select between personal vs car loan, you need to understand the impact it will have on your future borrowing potential. With a good credit score, you can enjoy favourable loan terms and quick approval. Lenders use this score to evaluate your loan application as they gauge your creditworthiness.
Conclusion
As you can see, both personal and car loans come with their set of pros and cons. While the former is an unsecured form of credit with slightly higher interest rates, the latter requires you to pledge the vehicle as collateral.
A personal loan has no end-use restrictions, which implies that you can use a personal loan to buy a car. That said, you need to compare interest rates offered by various lenders for these two forms of credit. After you review your financial commitments, you can opt for a loan that best fits your long-term goals.
One such lender offering both forms of credit at competitive rates is Mahindra Finance. You can apply for a car loan to purchase your dream four-wheeler or opt for a personal loan, or Suvidha Loan, to manage additional expenses.
Suggested Read: 5 Important Things To Consider Before Applying For A Car Loan
FAQs On Car Loan vs Personal Loan
Q1. Is it easier to qualify for a car loan or a personal loan?
Yes. This is because a car loan is a secured form of credit where the ownership stays with the lender until you repay the borrowed amount. However, a personal loan approval is entirely dependent on your credit history and financial stability.
Q2. Which loan has lower interest rates, a car loan or a personal loan?
A car loan offers comparatively lower rates than a personal loan, owing to its secured nature. Since the vehicle serves as collateral, the risk factor reduces for the lender.
Q3. Can I use a personal loan for a down payment on a car?
Yes. You can apply for a personal loan and use the amount to make a down payment for your car. This is because of the versatility and financial flexibility of personal loans, enabling you to use the amount for different purposes.
Q4. How does the repayment period differ between a car loan and a personal loan?
The repayment tenure for a car loan varies between 1 and 7 years, while in the case of a personal loan, it varies from 6 months to 5 years.
Q5. What happens if I default on a car loan compared to a personal loan?
Since the vehicle is pledged as collateral, defaulting on a car loan may result in the lender selling your vehicle to recover the amount. On the other hand, if you default on a personal loan, the lender may take legal action, as there is no collateral attached to it.