As our world modernises and evolves, cars have become necessary for daily life. From commuting to running errands, a car can provide the convenience, freedom, and flexibility necessary for today’s fast-paced society. However, buying a car can be expensive for many, and a loan is the best alternative. Many people opt for a car loan as a financing means, while some opt for Cash loans. The decision between a personal loan vs car loan to finance a new car can seem daunting.
There are pros and cons to both types of financing, and it is essential to consider your financial situation when making the decision. This article will cover the prime difference between a car loan and a personal loan to help you decide which is best for your needs.
Here are some of the important features of a car loan:
The interest rates for secured loans like car loans are cheaper than those on other types of finance, such as personal loans.
A car loan can be taken only for buying a car.
Banks provide car loans with terms of up to 10 years.
The loan usually doesn’t exceed 80-90% of the car’s cost.
Car loans are secured loans. When applying for a car loan, the car serves as collateral. If you default on the loan, the bank can seize the vehicle and sell it to recoup the debt.
Here are some of the important features of a personal loan:
Personal loans are unsecured loans and can be obtained without pledging any security, such as your home or vehicle.
Personal loans may be taken out for various reasons, including buying a car, consolidating debt, financing a trip, paying urgent medical bills, and more.
Once the application is approved, the disbursement of a personal loan may take only a few hours.
There is little paperwork to fill out, accelerating the loan process speed.
Personal loans come with a repayment tenure of 6-7 years.
Here is a table that compares the characteristics of personal and car loans to help you understand the fundamental distinctions between a personal loan vs car loan.
|Parameter||Personal loan||Car loan|
|Loan Amount Offered||Up to 100% of the cost of the car as a loan||Up to 80% – 90% of the automobile’s price|
|Interest Rate||Higher interest rates||Lower interest rates|
|Tenure||Short tenure||Long tenure|
|Ownership||Car ownership is transferred immediately||Car ownership is transferred once the loan is repaid|
|Collateral||There is no collateral requirement||The car serves as collateral|
|Loan Amount End Usage||Can be used to meet any financial requirement||Can be used only for car financing|
Generally, a personal loan provides a loan amount that could cover the total expense of a car. In contrast, a car loan usually offers up to 80%-90% of the car’s final price. The remaining 10%-20% you have to pay out of your pocket.
When we compare car loan vs personal loan interest rates, personal loans often have substantially higher interest rates. That’s because they are unsecured loans having higher degree of risk in terms of loan default.
Compared to personal loans, car loans carry lower interest rates. The reason being car loans have lower degree of risk because you are already putting up your car as collateral to the lender. If you default on your loan, the lender could seize your car to recover the cost.
Personal loans often have a tenure of 12 to 84 months, whereas automobile loans typically have a term of 36 to 120 months. Shorter tenures result in higher EMIs but lower interest payouts, whereas longer tenures result in lower EMIs but higher interest payouts.
The ownership of the vehicle is one significant distinction between a personal loan and a car loan. Since car loans are secured loans, the borrower will not receive ownership of the automobile until the full debt has been paid.
Conversely, a personal loan will grant ownership as soon as the borrower buys the automobile.
A personal loan does not require the borrower to pledge any collateral, whereas for car loans, your car acts as the collateral.
Personal loans don’t have any end-usage restrictions. You can use the loan amount to meet any financial requirement – from paying your bills to financing a car.
For car loans, the loan can be used only to purchase or finance a car. You cannot use the loan to meet any other financial requirement.
To decide whether to choose a personal or a car loan to finance your car purchase, you need to weigh elements, including loan term, principal amount, EMI amount, and the interest you desire to pay throughout the loan.
If you want to repay the loan over a longer time but cannot make a hefty EMI payment each month, car loans may be a smart option. However, personal loans are easier to access. Additionally, there are no end-use restrictions – you can use the loan amount to finance your car or meet any other financial requirement.
Another point to keep in mind is you might not get 100% financing of your car via a car loan. Such is not the case with personal loans.
Personal and car loans are excellent financial tools for those looking for additional financing. The key is to compare a personal loan vs car loan, assess the associated costs and fees, and determine which product best meets your individual needs and budget. Ultimately, taking out a loan must not be done lightly, but with careful consideration and research, it can be a great way to make significant purchases more manageable.
Ans. Yes, you may finance the purchase of a car with a personal loan.
Ans. Since car loans are backed by collateral, they often have lower interest rates than personal loans.
Ans. Personal loans can be acquired without pledging any security. They are also instantly approved with quick disbursement of the loan amount.
Ans. Various lenders may have different maximum loan amounts that can be approved. Lenders often issue loans up to 80% of the car’s on-road price.
Ans. If you do not pay your car loan EMIs on time, your lender may seize your car and sell it to recover the loan amount. Moreover, your credit score could be adversely affected.
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