In India, spending on cars climbed as per capita income rose. You must search the lending market for a suitable car loan if you intend to take out a loan to purchase a new vehicle. You should be aware by now that lenders will only finance up to 80% of the price of your car. Consider obtaining a personal loan rather than a car loan if you are unable to pay the final 20% of the cost of your vehicle out of pocket. There are several variables to consider when deciding whether to obtain a personal loan or a car loan to finance the purchase of a vehicle.Let’s comprehend them:
Collateral
Car loans are secured as the collateral will be your car. If you default on your loan, the lenders will confiscate your car. On the other hand, personal loans are not given against collateral and hence if you buy a car and are unable to pay the loan, the lender will not be able to seize your car. Of course, they will initiate other actions to try and recover the loan amount.
Interest Rates and Loan Amount
Personal loans generally have higher interest rates than car loans. The reason for this is obviously that unsecured loans such as personal loans do not have collateral to back them, unlike car loans. The loan interest rate you will serve on a personal or car loan depends on your credit score and credit rating. When buying a car, you will want to get it with a low-interest rate.
Thus, with a good credit rating and a personal loan, you will have two advantages – you will be able to get the full cost of your desired car in the form of a loan, that too at a competitive interest rate. People with good credit ratings are also eligible for higher Personal Loan amounts, hence the cost of your car is covered under the personal loan umbrella.
Car loans fall under the category of low-risk loans as they are secured loans whereas it is not the case with personal loans. So, if your credit score is slightly lower and you want to buy a car, a car loan will do the trick for you as it is a secured loan. Also, a person with a low credit score can get up to 80% of the cost of the car as a loan amount through a car loan, but not through a personal loan, as the lender does not risk giving large loan amounts to those people. Persons with a low credit score may get a Personal Loan from a lender but at a much higher interest rate.
Down-Payment
As mentioned above, if you are taking a car loan, you will get only 80% of the cost of your car as the loan amount. However, a personal loan might cover the entire cost of your car. Also, if you do not have the funds to pay 20% of the cost of your car readily available with you, you can go for a personal loan instead of a car loan.
Purpose
The money you borrow through a car loan can only be used to buy a car, while money borrowed through a personal loan can be spent on numerous other things, apart from a car.
Ease of Availing
As mentioned above, personal loans are unsecured. Lenders are very careful while giving a personal loan. If you apply for a personal loan when you have a bad credit score, you will be intimidated by market-high interest rates, or your application will be rejected because your risk-to-value is too high.
The lender will approve your car loan relatively easily. The process of applying for personal and car loans has been made extremely easy by banks and NBFCs and you can always visit the website of the lender to find out more. The lending requirements of personal loans are more stringentas it is unsecured, however, the collateral of the car loan makes the lending requirements easier for its borrowers.
Many times, you can do an on-the-spot deal of a car loan at a car dealer location as car dealers have tie-ups with many top banks and NBFCs. However, personal loans involve some degree of documentation and background checks. Your loan application is thoroughly scrutinized and only if there are no red flags does the lender approve the loan.
Loan Tenure
Personal loans and car loans have different tenure ranges. Personal loans are usually of 1-5 years while car loans are usually of 3-8 years. Longer tenure means lower EMI amount and higher interest payments for the borrower. On the other hand, shorter loan tenure means a higher EMI amount and lower interest payments for the borrower.
Title
Since the car loan is secured, the car will not be bought or transferred in your name until you have paid the last instalment. Also, you will have to make a down payment at the beginning of the car loan as your car is not 100% financed through a car loan. However, these days, there are also 100% financing car loans in the market, but their interest rate or tenure is higher than the regular ones.
On the other hand, if you finance your car through a personal loan, you will get the ownership of your car instantly and no down-payment is required on your part if you secure the desired loan amount.
To Conclude
To decide between a car loan and a personal loan for buying a car, you must compare interest rates, tenure, loan amount, EMI, etc. in both cases and from multiple lenders. Generally, a loan specially meant for a purpose serves better for that purpose. However, in case you have a slightly lower credit score and are ready to bear a higher interest rate, you may opt for Personal Loan. Whichever loan type you opt for, regular repayment and disciplined spending habits are key to keeping you in good financial health.
