Cars today have become a staple commodity for all classes of Indian citizens. It has become a necessity rather than a luxury especially for people living in cities. Therefore, purchasing a car has become equally important to purchasing a home.
With the rise in the purchase in the car in the last decade, the banks have come up with specialized loan products to fund the purchase of cars. However, people still find it convenient to finance their vehicles through a personal loan.
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The main question here is, what you should avail, a car loan or a personal loan? Here are some main differences that will allow you to understand which kind of loan serves the purpose better:
The most basic difference between a car loan and a personal loan is the collateral on loan. A car loan is secured and thus the lender agrees to pay the amount against the security. So your car is mortgaged to the bank during the loan term until the debt is repaid in full. Once your loan is repaid you need to do some legal formalities to remove the hypothecation removed at the local RTO.
If you want to avoid this hassle you can get your car financed by an unsecured personal loan. Also, your car is saved from being hypothecated at the bank.
See Also: How to Apply for Car Loan?
Let’s also examine the points that are of utmost importance for the sanction of your bank loan. Availing a car loan from a bank will require you to fulfill the eligibility criteria set by the bank. In case you don’t meet it, you need to look for other options, one of which is a personal loan. But a personal loan charges a higher interest amount than a car loan.
Your credit score decides your loan eligibility and thus if your credit score is lower than 750 points your lender may deny you a car loan. In such circumstances, you may avail a personal loan with a slightly higher interest rate.
Interest rate is an important factor between a secured and an unsecured loan. Nowadays car loan interest rate ranges from 9% to 15% whereas a personal loan interest rate charged varies from 11% to 25% among lenders.
The loan interest rate is sure to impact your budget and your overall cost of the loan. The higher interest rate will increase your overall cost which is not wise for a depreciating asset like a car. Therefore you should ideally opt for a loan that costs you less.
See Also: Why Do You Need a Car loan?
Even though car loan is a better option, many people find a personal loan to be a better option due to features like no-security and easy approval. Generally, banks ask for no specification on how the money from a personal loan is to be used. So you can avail a personal loan to fund the purchase of a new or used car. Therefore, it is a way to avail easy credit to fund the purchase of your car. Since you are not limited in your choice you can avail a personal loan to purchase a vehicle while keeping in mind the following things:
Remember personal loans are expensive as they are unsecured loans. So it is wise to compare the annual percentage rates. The APR gives an idea of the interest rate and the other charges levied by the lender. Make sure you are equipped with proper information before you approach the car dealer. For example how much you can borrow and at what rate.
Applying for any form of loan will lead to hard inquiries. If you apply for a personal loan and your loan application gets rejected then your credit score will get affected by the hard inquiry. Be careful about this if you are planning to avail a personal loan. You can use an eligibility calculator or can check your credit score for free to make sure you have the eligibility to get a personal loan.
You may opt for a personal loan to buy a car but make sure you don’t end up paying more money to your lender. Look for an affordable personal loan that will conveniently fit your budget.
If you avail of a loan at a fixed interest rate then your interest rate remains the same throughout the loan tenure. But for a variable interest rate loan, the interest rate will fluctuate. Be careful as you may end up paying more amounts in case the interest rate goes up.
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