Why Choose a Personal Loan to Buy a New Car? Top 7 Benefits

Given a car’s utility and today’s fast-paced lifestyle, one cannot deny that owning a car is a necessity. However, the cost of buying a new car makes it feel more like a luxury than a necessity. Even outside of metro cities, 75% buyers feel the need to opt for car loan financing when buying a car. 

Over 25% of car loan applications are rejected due to low credit score or unstable income. The high rejection rate of new car loans, coupled with stringent eligibility requirements, is making buyers turn to personal loans for buying a car. This blog explores the benefits of taking a personal loan for a car purchase.

Can You Use a Personal Loan for Buying a Car?

Yes, contrary to popular belief, a vehicle loan is not the only alternative, as you can also buy your dream car with a personal loan. A personal loan gives you greater financial flexibility to spend than a traditional car loan. You also have the flexibility to buy both new and pre-owned cars.

A personal loan is a type of unsecured loan, which means that you don't have to provide any collateral as security. A lender considers your creditworthiness based on income, credit score, and repayment history.

Features and Benefits of Car Loan vs Personal Loan

Here are the features of a personal loan that make it a smarter alternative to a new car loan:

7 Benefits of Using a Personal Loan for Buying a Car

As compared to personal loans, lenders have stricter eligibility requirements in place when assessing car loan application forms. A low credit score is the most commonly cited reason for rejection. Besides greater flexibility regarding credit score, the following are some benefits of using a personal loan for a car purchase:

1. Unsecured Loan: No Collateral Required

Car loans are secured loans, which means that your car acts as collateral for the borrowed amount. The lender puts a lien on it until the total amount with interest is repaid. This means that you do not have complete ownership of the car during the tenure of the vehicle loan. If you default on your car loan, the lender is more than likely to confiscate your car.

Personal loans, on the other hand, are unsecured, which means you don't need to provide any collateral. Borrowers will have greater peace of mind knowing that their car loan provider cannot seize their car even if they default on the loan.

2. You Enjoy Immediate Ownership of the Car

When you purchase any automobile using a vehicle loan, it is merely registered at the RTO under your name. It is hypothecated to the bank or NBFC that has provided you with the car loan. Hypothecation refers to a car being given to the bank or NBFC as collateral until the loan is paid back in full. The vehicle loan lender has a legal title to the car until the loan is repaid. You cannot sell, transfer, or pledge the car without the lender's consent.

On the contrary, you enjoy complete ownership of the car when you buy it with a personal loan. Suppose you are buying a car worth ₹10 lakh. Rather than choosing to apply for a car loan, you apply for a personal loan of ₹10 lakh or more or less. Once the money is credited into your account, you make the payment in full, which gives you immediate and full ownership of the car.

3. You Don't Have to Make Any Down Payment

Both banks and NBFCs follow the LTV (Loan-to-Value) ratio when approving car loans. An XYZ Bank, for example, offers loans with 90% of LTV. If you are buying a car worth ₹10 lakh, you can get a maximum loan of ₹9 lakh. You have to make the down payment of the remaining ₹1 lakh from your pocket.

When buying a new or pre-owned car with a personal loan, you don't have to make any down payment. You have the freedom to apply for any amount depending on your needs. You can also apply for a personal loan of up to ₹50 lakh with Poonawalla and repay it comfortably over 84 months.

4. Repay Easily with Flexible Payment Terms and Interest Rates

Car loans fall under the category of low-risk loans as they are secured loans. So, if your CIBIL score is slightly lower and you want to buy a car, you can still get a car loan. However, the amount and tenure are more or less pre-determined, and there is little scope for negotiation. Personal loan interest rates are marginally higher because they are more versatile and don't require collateral. Personal loans also have a more flexible repayment tenure, which makes it easy to repay the loan.

5. Flexible Eligibility Criteria

Lack of proper documents, low CIBIL score and unstable income makes it challenging for applicants to get financing in time. Personal loans, on the other hand, tend to have greater flexibility when it comes to eligibility criteria. You can apply for a personal loan regardless of whether you are a salaried person, self-employed professional or even a freelancer with a stable income. This makes it a perfect financing option for buyers who fail to meet the traditional car loan eligibility requirements.

6. More Versatile

A car loan, as the name implies, can only be used to buy a new car. Additionally, most vehicle loan providers don't extend credit for the purchase of a used car. With a personal loan, you have the freedom to use the funds to buy a new or used car. You can also use the money for any other financial need you may have besides buying a car.

Unlike a car loan, the car's cost doesn't determine the loan amount. If you qualify for a ₹20 lakh loan, you can buy a new car worth ₹20 lakh or a used one for ₹15 lakh and use the remaining amount for modification or upgrades. At Poonawalla, we also offer a pre-owned car loan of up to ₹75 lakh with attractive interest rates starting at just 11% p.a with minimal processing fee.

7. Minimal Documents, Fast Approval and Disbursal

One of the key benefits of purchasing a car with a personal loan is the speed and ease of the process. A new car loan is subjected to lengthy processes involving car quotations, dealer tie-ups, registration documents and hypothecation. Personal loans require minimal documentation, basic KYC, income evidence and bank statements.

The digital lending process now offers instant loan approval and disbursal within 24 to 48 hours. This flexibility is especially important when considering buying a used car, as you may miss out on attractive deals if you're not a cash-ready customer.

To Conclude

Using a personal loan for buying a new or used car proves to be a smart decision, as it offers flexibility, convenience and immediate ownership. You still must consider interest rates, tenure, loan amount and monthly payments (EMIs) when choosing between a vehicle loan and a personal loan for buying a car. Whichever loan type you opt for, regular monthly payments and disciplined spending habits are key to improving your credit score and keeping you in good financial health.

Frequently Asked Questions

What is the purpose of a used car loan EMI calculator?

You can use the car loan EMI calculator to estimate the monthly instalments. To use the calculator to know monthly EMIs, you must enter the loan tenure, amount and interest rate. The loan EMI calculator helps you predict your monthly payments with just a few clicks.

How does car loan eligibility compare with personal loan eligibility?

The eligibility of a car loan depends on the type of vehicle, age, and tie-ups with dealers, besides your income and credit profile. Personal loans offer more flexible terms and only require income documentation and a secure credit rating.

Does my credit score influence my ability to obtain a Personal Loan for a car?

Yes, a good credit score (usually 750 or more) increases your chances of being approved for a personal loan. It also gives you the leverage to negotiate for lower interest rates.

How long does a car loan application take to process?

The time of car loan approval varies from lender to lender. It usually depends on the lender and the thoroughness of your paperwork.

Will using a Personal Loan for a car affect my credit history?

Yes, like any other type of credit, paying a personal loan back on time has a positive influence on your credit history. Personal loans, unlike car loans, which are hypothecated, appear as unsecured credit, further increasing your creditworthiness.