Personal Loan vs Car Loan Interest Rates – Which is the Better Option?

Buyers of a used or second-hand car often face a key financing decision: should they take a car loan or opt for a Personal Loan? Understanding Personal Loan interest rates compared to car loan interest rates can help you choose the more affordable option. This blog breaks down the differences to help you make an informed decision.

Understanding Car Loan and Personal Loan Interest Rates

A secured loan on which a vehicle is the security is a car loan. The lenders would normally charge a lower interest rate since the asset would have less risk to the lenders. On the other side, a Personal Loan is not a secured one and does not need any security. Consequently, the difference in interest rates of a car loan and a Personal Loan can be enormous.

The interest rate on car loans in India typically starts from around 8.5% per annum for new cars. For used or second-hand cars, interest rates generally range from about 11% to 18% per annum, depending on the lender and the borrower’s profile.

Personal Loan interest rates typically range from around 9.99% per annum to 24% or more, depending on credit score, income, and lender policies. 

The interest rate on a car loan and a personal loan differs due to the availability or lack of collateral.

Key Differences: Personal Loan vs Car Loan

The key differences between a Personal Loan and a car loan to finance a car purchase in India are shown in the table below:

Note: All figures are indicative and subject to borrower profile and lender terms

When Should You Choose a Car Loan Over a Personal Loan?

A car loan is usually more beneficial for financing a used car because of lower interest rates. Because the vehicle serves as collateral, lenders offer more favourable car loan interest rates than personal loan rates. In such cases of a car loan:

●    Lower EMI Burden: The decreased interest charge will be translated to fewer monthly instalments during the tenure.
●    Longer Repayment Period: Car loans have a long term of up to 7 years, which makes your use of cash easy.
●    Higher Loan Amount: Lenders may approve a higher loan amount at better terms compared to an unsecured Personal Loan, because the vehicle acts as collateral.
●    Tax Benefits for Business Use: In the case where the vehicle would be used in business, the interest paid would be considered a deductible expense of the vehicle.

When is a Personal Loan a Better Fit?

There are situations where a Personal Loan may be a better option, even though Personal Loan interest rates are usually higher than car loan rates. Here are some reasons why this option can be considered:

●    No Collateral Required: Personal Loans are unsecured, so there is no hypothecation on the vehicle.
●    Flexible Usage: You can use the loan amount for registration, insurance, accessories, or any other related expenses not included in the car’s price.
●    Faster Disbursal: Personal Loans are often processed more quickly, sometimes within 24–48 hours for eligible applicants.
●    Financing Older Vehicles: Many lenders do not offer car loans for vehicles beyond a certain age (often 8–12 years). In such cases, a Personal Loan can help bridge the gap.

How Car vs Personal Loan Interest Rates Affect the Total Cost 

A slight difference in interest rates between a car loan and a personal loan can have a significant impact on repayment amounts. 

For example, on a ₹5 lakh loan with a 5-year term, a 3% difference in interest can result in an additional ₹45,000 in interest paid over the life of the loan. You must always compare the effective annual rate, processing fees, and prepayments before making a decision.

An EMI calculator can be used to visualise the difference in cost. Enter the amount of the loan you want, the interest rate, and the interest paid over the tenure to understand how the variation in the interest rate of a car loan and a Personal Loan affects your daily payout.

Factors to Consider Before Choosing Between a Car Loan and a Personal Loan

Before deciding which financing option works best for you, it’s important to evaluate a few practical factors that can affect eligibility and repayment cost.

●    Vehicle Age: In case the used car is above 10 years old, then it may not qualify to take out a car loan. A Personal Loan remains a viable option.
●    Loan Amount: The better terms of a secured car loan will generally be better than an unsecured Personal Loan with higher values.
●    Repayment Flexibility: Compare foreclosure and prepayment. Other lenders impose a penalty against early repayment.
●    Credit Score: With a CIBIL score of 750+, you can be able to bargain with any lender in terms of interest rates charged on a Personal Loan vs a car loan.
●    Total Cost of Ownership: When estimating the total budget of a second-hand car, costs like insurance, registration, and maintenance should be included.

To Conclude

The choice between a Personal Loan and a car loan depends on your financial profile, the vehicle's age, and your repayment preferences. A car loan typically offers lower interest rates and longer tenors, making it suitable for relatively new used cars.

A Personal Loan, on the other hand, offers greater flexibility and faster processing, especially for financing older, second-hand vehicles. Always compare Personal Loan and car loan interest rates, calculate the EMI, and evaluate the overall cost before making your final decision.

Looking to finance your next vehicle? Explore the Used Car Loan from Poonawalla Fincorp or apply for a Personal Loan with competitive rates and quick approval.

Read Also: How Online Personal Loan is Changing the Finance Industry?

FAQs

Which has a lower interest rate, a car loan or a Personal Loan?
A car loan is typically charged at a lower interest rate because it is secured by the vehicle.

Can I use a Personal Loan to buy a used car in India?
Yes, you can use a Personal Loan to buy a used car in India, as it is unsecured and has no end-use restrictions.

Do Personal Loan vs car loan interest rates vary by credit score?
Yes, a high CIBIL score can help you secure lower interest rates on Personal Loans and car loans.

Is a down payment required for a Personal Loan to buy a car?

No, a Personal Loan does not require a down payment because it is unsecured.

Can I prepay a car loan or a Personal Loan without penalty?
Prepayment policies vary by lender. Some lenders allow foreclosure or part-prepayment after a lock-in period, while others may charge a fee.