Car Loan vs Personal Loan—Which is Better?

According to industry reports, India’s overall car loan market is growing steadily, supported by rising disposable incomes, better financing options, and the introduction of new vehicle models. However, whether you're planning to purchase a brand new vehicle or buying a certified pre-owned car, choosing the right financing option is essential.

With the purchase can be funded by either a Personal Loan or a car loan, each have their own pros and cons. If you’re evaluating car loan vs Personal Loan options, understanding the differences can help you make an informed decision.

In this blog, we compare both methods to see which suits your financial needs best. Read on to know more!

Understanding Car Loans

• Purpose: A car loan is a loan specifically designed to help individuals finance the purchase of a vehicle, whether new or pre-owned (with a Used Car Loan). 

• Collateral: An Auto Loan is usually secured in nature, i.e., the car that you purchase also serves as the collateral for the lender. The lender retains ownership of the vehicle until the loan is fully repaid. If you fail to repay your loan, the car gets seized as an asset.

• Approval Process: Since car loans have your car as collateral, the approval process includes the lender examining the value of your car, the requested loan amount, and your ability to repay the loan.

• Interest Rates: As with most secured loans, the interest rates on car loans are typically lower than Personal Loans.

• Loan Amount & Tenure: The value of your car will determine the final loan amount that the lender approves you for. It usually is a percentage of the total cost of the car and sometimes can even be the entire cost, depending on your creditworthiness and down payment. The tenure is normally fixed although some lenders may offer flexible tenures to choose from.

• Financial Considerations: With a car loan, you will be making payments towards the maintenance of your dream car alongside monthly EMIs to repay your loan. Over time, your car will depreciate as well. It’s important to plan your finances wisely to avoid defaulting on your loan down the line.

Understanding Personal Loans

• Purpose: Unlike car loans, a Personal Loan has no restrictions on the end-use of the money you borrow. From funding the purchase of a car to bearing wedding expenses or covering medical emergencies, you can use it how you please.

• Collateral: Personal Loans do not require any sort of collateral, making them unsecured in nature.

• Approval Process: Personal Loan approvals are conveniently quick! If you meet the eligibility criteria and have a high credit score, you can get approved for a loan in a matter of minutes or a few hours.

• Interest Rates: Since a Personal Loan is an unsecured loan, lenders evaluate your reliability as a borrower based on your creditworthiness and repayment capacity alone. Not having the security of collateral increases the Personal Loan interest rate you’ll pay.

• Loan Amount & Tenure: Personal Loans generally have flexible tenures, and the final amount (though dependent on your creditworthiness and repayment ability) can go up to as high as ₹50 Lakh.

• Financial Considerations: Keep your monthly income in mind when deciding the tenure of the loan. Shorter tenures mean higher monthly payments and lower overall interest amount; longer tenures increase the interest but lower the EMI. Most importantly, you need to meet the eligibility criteria and credit score requirement, or your Personal Loan application maybe denied.

Comparing Personal Loan Vs Car Loan

As stated before, personal loans and car loans come with their inherent advantages and disadvantages. The following comparison table highlights key differences between the two.

Should I Take A Personal Loan To Buy A Car?

There is no restriction to using the funds obtained from a Personal Loan to finance the purchase of a car instead of opting for a car loan. However, a Personal Loan usually comes with higher interest rates than Car Loans. If eligible, a Car Loan may be more cost-effective due to lower rates and longer tenures. You need to weigh all the pros and cons, keeping in mind your own monthly income and your ability to be financially disciplined.

In either scenario, defaulting on the loan is met with serious consequences, and your credit score will suffer with every missed EMI. Calculate your EMIs and draft up a financial plan and repayment schedule before you finalise the loan.

To Conclude

When deciding between a Car Loan and a Personal Loan, consider what constitutes a good credit score, your financial goals, and the purpose of borrowing. Personal Loans offer flexibility for multiple needs, while Car Loans are tailored for vehicle financing, offering structured repayment and lower interest rates compared to unsecured loans. Evaluate key factors such as loan tenure, eligibility, repayment capacity, and repayment terms to make informed financial decisions and choose the most suitable option.

If you’re on the lookout for a reliable lender, check out Poonawalla Fincorp’s loans. We offer attractive interest rates, flexible tenures, and ease of application as well.

Frequently Asked Questions

Why are car loan interest rates lower than Personal Loan rates?

Car Loan interest rates are often lower than Personal Loan rates due to the secured nature of the loan. Since the car serves as collateral, lenders face less risk, allowing them to offer more competitive interest rates compared to unsecured personal loans.

Why is it easier to qualify for a car loan than a Personal Loan?

The eligibility for Car Loans is often easier for car buyers because of their specific purpose and collateral. Since the car acts as security, lenders are more willing to approve the loan, even for applicants with moderate credit scores.

Why does a Personal Loan tend to have higher interest rate than a car loan?

Personal loans typically have higher interest rates compared to car loans because they are unsecured. Since there's no collateral involved, lenders consider them riskier and compensate with higher interest rates.

Is it better to purchase a car on loan?

Yes. Car Loans offer structured EMIs, competitive interest rates, and, in many cases, financing of up to 100% of the car’s ex-showroom price, making car finance more accessible. Whether new or certified pre-owned, Car Loans help make ownership more affordable through manageable monthly payments.

What are the benefits of an auto loan?

Car Loans offer competitive interest rates, longer repayment tenures, high loan amounts, and flexible financing options. They also allow for easy digital application and minimal documentation.

Why are personal loans a popular financing option?

Personal Loans do not require collateral, making them a popular choice for various purposes due to their unsecured nature, providing financial flexibility. Since they are unsecured, they are ideal for funding a wide range of needs, such as medical emergencies, travel, home renovation, or even buying a used car without affecting existing debts.

Why should you consider taking a Personal Loan?

Personal Loans are versatile financial products that provide borrowers with a lump sum amount to use as they see fit. These loans are unsecured, meaning no collateral is required, and they can be used for various purposes. Most lenders in India offer flexible repayment tenures ranging from 1 to 5 years, with interest rates depending on the borrower’s creditworthiness.

What is the typical tenure of a Personal Loan?

Personal Loans usually come with shorter tenures, typically ranging from one to seven years. The exact loan tenure offered depends on the lender’s policy, your credit profile, and the loan amount. While most lenders in India offer terms of 1 to 5 years, some extend up to seven years for higher-value loans, thus providing more flexibility.

Which is better car loan or Personal Loan?

While the choice between a car loan and Personal Loan is largely dependent on your personal financial needs and preferences, in general, the former can be used to finance a car purchase only, while the latter has no end-use restrictions.

Which is more expensive, a car loan or a Personal Loan?

The interest rate of a car loan is generally more affordable than a Personal Loan. However, the final rate of interest depends on a lot of factors including your creditworthiness, repayment history and others.

Which has typically higher monthly payments between personal loan vs car loan?

When it comes to Personal Loan vs car loan, the former comes at higher interest rates due to their unsecured nature. Car loans on the other hand comes at comparatively affordable rates due to their secured nature.