Personal Loan vs. Car Loan: Which Is Better?

Buying a car is a major decision in life. In addition to the decision itself, how you finance your purchase is equally important. Should you choose a car loan or a personal loan? Let us understand the concept of personal loan vs. car loan and how each option will have its benefits and demerits. 

What is a Personal Loan?

A personal loan is a type of unsecured loan where there is no limitation to the use of allocated funds. Once you get approval for a personal loan application, you can use the available funds for any objective. 

When you apply for a personal loan, the amount of loan you will receive will depend on certain factors, like creditworthiness, your debt-to-income ratio, and overall employment stability. In addition to banks, several online personal loan apps offer you loans at attractive interest rates. Moreover, when you apply online, there is minimal documentation involved.

Personal Loan Features:

• Short tenure
• Unsecured loans, no requirement to pledge any collateral
• Simple documentation
• Available from banks and online lenders
• Can be used for any purpose
• A higher interest rate in comparison to a secured loan
• Amounts can vary between INR 50k and INR 40 Lakhs

What is a Car Loan?

A car is primarily a standard necessity for any individual or family. However, buying a car out of your savings can prove quite expensive. This is where the role of a car loan or an auto loan comes in. It is possible to get car loans easily from a bank or an online lender to purchase your dream car. 

It is possible to get a car loan for buying both a new vehicle and a secondhand one. It is possible to access a car loan for a new vehicle in comparison to a second-hand model. In the case of buying a new car, the interest rate for the car loan is also quite low. In this manner, you can get almost 100 percent of the car’s price in the form of a loan. 

Car Loan Features:

• Available from banks, NBFCs, and online lenders
• Can be availed only for purchasing a car
• Ownership of the car remains with the lender unless the full loan amount has been repaid
• It is a type of secured loan in which the car bought serves as the collateral
• The amount of the car loan can go up to 100 percent in case a new car model is bought
• The tenure of a car loan can be up to 7 years, depending on the price of the vehicle
• The amount of the car loan can be limited to 80-90 percent of the car’s cost in case you are buying a second-hand model
• More documentation is needed in comparison to a personal loan
• As it is a secured type of loan, you can apply for a car loan even with a low credit score
  

Benefits of Applying for a Personal Loan Over a Car Loan While Buying a Car

Even with the ease of availability of car loans, you can utilize funds from a personal loan to buy a car. There is no denying the fact that there are several benefits to applying for a personal loan to buy a car. Here are some:

1. No Need for a Downpayment

You can apply for a personal loan without making a down payment of the car’s value. Therefore, if you want to buy a second-hand car model without making any down payment, you can choose a personal loan to fund the total amount.

2. Car Ownership Remains with You

With the help of a personal loan, there are no conditions of retaining the vehicle with the lender or submitting any proof of purchase. This makes sure that your car is in your ownership right from day one. 

With a personal loan for buying a car, you can eliminate the hassle of getting ownership of the car at the end of the loan tenure, unlike with a car loan. It can also serve as a useful tool while selling a car. In addition to this, if you default on the EMI of the personal loan, you will not end up losing possession of the car.

3. Minimal Documentation

A personal loan does not need extensive documentation during the application process. When applying for a personal loan to buy a car, you only need to submit a few important documents, including proof of address, proof of identity, and proof. When you apply through an online app or platform, you can finish the application process in a few minutes while receiving the desired funds in 24 hours.

4. Shorter Loan Tenures

Typically, car loans come with longer tenures. On the other hand, personal loans can be as short as three months. If you wish to ensure that your loan amount is fulfilled easily, you can choose a personal loan for buying a car.

Additional Factors to Consider When Choosing the Right Loan for Buying a Car

• Loan Processing Time: The total time it takes between a loan application and approval can vary between a personal loan and a car loan. Typically, personal loans have a faster processing time as they are unsecured. As car loans might require in-depth verification, they will take more time for processing.

• Prepayment and Foreclosure Charges: Before you choose the right type of loan for buying a car, look into the prepayment and foreclosure charges associated with the loan. These fees tend to affect your overall borrowing cost to a great extent. 

• Tax Benefits: In some cases, car loans can offer tax benefits. For instance, the interest on a car loan can be tax deductible, given that the vehicle is used for business purposes. On the other hand, personal loans do not offer tax benefits. 

Conclusion

Whatever might be your choice, it is important to conduct in-depth research while comparing different types of loans for buying your dream car. You should also look into your budget and long-term financial goals while making the best decision.