Looking for the right financing option in life? You can come across this stage when you have to make a major purchasing decision in life. If you are buying a new car or funding personal expenses, car loans and personal loans are beneficial in their unique ways. The final choice between a personal loan vs. a car loan will make you look into your objectives and financial goals.
What is a Personal Loan?
A personal loan offers you the necessary funds from a leading lending institution like a bank in a lump sum. A major benefit of a personal loan is that you can leverage this amount at your discretion without any restriction. This type of spending typically includes a wedding, paying for a vacation, or some home improvement project.
Most personal loans tend to be unsecured. However, a personal loan can be secured against some assets, like a home or a vehicle. When the personal loan is secured, the lenders can make use of the asset to recover the losses in case you are not able to repay the loan amount.
What is a Car Loan?
A car loan serves as a secured form of loan. This type of loan is secured with the vehicle you buy. If you default on the payment, the lender will end up seizing your vehicle to balance out the losses. Quite similar to a mortgage, the lender will eventually retain ownership over the asset until you are able to make the final payment.
Typically, car loans are paid off in the form of monthly installments with varying interest rates and terms. One of the most common loan terms for a car loan is five years.
What are the Differences Between Personal Loans and Car Loans?
Some of the important points to consider while understanding a personal loan versus a car loan are:
1. Amount of Loan
- Personal Loans: When you compare personal loans vs. car loans, the typical loan amount can range between INR 75k to INR 35 Lakh. This loan amount can be used to fund any major expense, including a vacation, a wedding, or a home renovation. The personal loan amount you receive will ultimately depend on your creditworthiness, the policies of the lender, and your income.
- Car Loans: Usually, the cost of the car that you wish to purchase will determine the loan amount in this case. The amount you will borrow will typically depend on the percentage of the car’s price or even the entire cost based on your creditworthiness and down payment. Usually, financial institutions offer car loans up to INR 50 Lakh.
2. Purpose and Flexibility
- Personal Loans: A personal loan is known to offer greater flexibility. This is because you can use the loan amount for varying purposes, like for bearing medical expenses, loan consolidation, overseas vacations, or home renovations. This flexibility makes the concept of personal loans highly attractive for those looking for financial support due to various reasons.
- Car Loans: Car loans are offered by lenders to borrowers who want to purchase a car. A major difference between car loans and personal loans is that you can leverage personal loans for various purposes, while car loans are only meant for buying cars.
3. Secured vs. Unsecured
- Personal Loans: These are unsecured forms of loans. This implies that you are not expected to provide any type of collateral. Personal loans are also available with flexible repayment options like step-up EMIs or standard EMIs. This allows borrowers to repay the loan amount without causing any stress to their finances.
- Car Loans: In this type of loan, the vehicle you purchase serves as the collateral. Typically, secured loans tend to feature lower interest rates. This is because the lender will always have a claim on your vehicle in case you are not able to repay the loan amount. Collateral minimizes the risks of the lender, leading to more favorable terms for the borrowers.
Should I Take a Personal Loan to Buy a Car?
If you get access to a significant personal loan amount, you can think of using the amount to buy a car. This is because funds from a personal loan can be used for any goal without any restriction. However, with a dedicated car loan, you can get lower interest rates on your loan application.
Personal Loan vs. Car Loan: Which is the Best for You?
The ultimate choice of the type of loan will depend on your specific goals and ease of repaying the loan amount.
A personal loan works better in the following situations:
- Personal loans can be used for a broader purpose like financing a wedding, a home renovation project, covering education costs, or paying for medical treatment.
- If you want the loan amount to cover other costs, like modifying or upgrading the vehicle.
- If you are buying a non-standard or old vehicle that is not eligible to be used as collateral.
On the other hand, you can apply for a car loan in the following cases:
- If you are looking to fund a new car and do not need the loan to cover other costs, a car loan will serve as a cheaper option. This is especially true if you come across a car loan option offering flexibility on extra repayments without penalty.
- A car loan, wherein the vehicle is used as collateral, can also minimize the risks in the eyes of lenders in case you have poor credit or you are self-employed.
- A car loan is a secured type of loan for buying other vehicles like a motorbike, boats, or even caravans.
Interest Rates: Comparing Personal Loans and Car Loans
The interest rates for personal loans tend to be slightly higher than car loans as they are unsecured. Lenders of personal loans might charge a higher rate of interest because lending without collateral is regarded as risky.
Conclusion
A car loan is particularly designed to assist individuals in buying their dream car. On the other hand, personal loans deliver flexibility for various expenses.
Frequently Asked Questions:
Is it good to take a personal loan for a car?
Taking a personal loan for a car can be a viable option, especially if you have a good credit score and can manage the monthly EMIs. However, consider factors like interest rates, tenure, and your overall financial situation before making a decision.
Is car loan interest higher than a personal loan?
Personal loans have a higher interest rate than that of a car loan. Still, if you have a decent credit score, you can obtain a lower rate with a personal loan as well.
Is personal and car loan the same?
You can use a personal loan for various purposes, even buying a car. However, a car loan can be dedicatedly used to fund a car.
Why is a personal loan better?
Personal loans offer quick access to required funds for a wide range of purposes, like funding a wedding, a medical emergency, or even your vehicle purchase.