Personal Loan Vs Car Loan: Which Loan Should You Choose To Finance Your Car?

When the pandemic shut down all public utilities, many realized the importance of owning a vehicle. This collectively led to an increased desire among the general public to purchase a car. However, buying a car is not an easy decision. The decision of financing a car is as tough as purchasing one. Lenders offer various options to help people fund their vehicles. Two of the most coveted options are

Car Loan

  • Personal loans
  • Vehicle loans

However, which loan works best? Both options can be used to finance the car. We’ve put together some tips to help you make an informed decision.

The difference between a personal loan and a vehicle loan

  • Personal Loan

Personal loans are typically unsecured and have several different uses. They may be used for a variety of reasons, such as debt consolidation, house renovations, and vehicle repair. Personal loans can finance almost any type of expense, even purchasing a new car.

  • Vehicle Loan

The vehicle you intend to purchase in car loans serves as collateral, meaning the car serves as the loan’s security. Throughout the loan, you will be required to pay off fixed installments. Your lender has the right to seize your car in the event you default on repayments.

Let’s look at the pros and cons of these loans –

Personal LoansCar Loans
Pros
  • No upfront payment: Getting a personal loan to purchase a car is an excellent option since you do not need to make a down payment.
  • Default Consequences: Defaulting on the loan will not cause your lender to repossess your car, unlike the case of a car loan.
  • More flexible: You can use a personal loan to purchase any car you like, provided you can afford to pay back the loan. Moreover, you can calculate your EMIs using the personal loan EMI calculator available on the lender’s website.

Cheaper interest rates: The interest rates on car loans are lower than personal loans. Lenders can offer lower interest rates on car loans because they have the car as collateral for the loan.

  • Easily accessible: The car loan eligibility criteria are easier to meet with fewer requirements.
Cons

Costlier: Usually, personal loan interest rates tend to be higher than car loans. This is because of the unsecured nature of personal loans. Personal loans have elevated interest rates because they have a greater risk of default.

  • Eligibility: The personal loan eligibility criteria are comparatively challenging to meet with more requirements.

 

  • Requirement for a down payment: A down payment will be required by most lenders. When you do not have enough savings for a down payment, it is not easy to receive approval for a car loan.
  • Repossession of your car: When you miss payments or default on your loan, your lender can repossess your car kept as collateral for the loan.

Conclusion

Generally, people opt for vehicle loans if they are sure to not default on their EMIs, else they stand the risk of having the lender repossess their car. On the other hand, personal loans are preferred by people that do not want to compromise their assets as collateral. Personal loans are also preferred when people don’t have enough savings for an upfront token. However, higher personal loan interest rates often deter people from opting for personal loans for purchasing vehicles.

In light of the above, it would be wise to check the personal loan eligibility criteria and predetermine your EMI using the personal loan EMI calculator before opting for the same.