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Should You Take a Personal Loan to Buy a Car?

Image for representation only.

Image for representation only.

If you are one of the many people looking to purchase a car through a loan, there might be cases wherein you asked yourself – Should I take a car loan or personal loan to buy the car?

Buying a car is a dream most of us harbour, with banks more than happy to assist us in fulfilling this dream. With car manufacturers offering models for every budget, owning a car today is easier than it ever was. It is perhaps this ease of owning a vehicle which has seen the number of vehicles on Indian roads increase to over 200 crore. Thousands of new cars and bikes are added to our streets on a daily basis, with most of these taken on loan.

If you are one of the many people looking to purchase a car through a loan, there might be cases wherein you asked yourself – Should I take a car loan or personal loan to buy the car?

Well, to be truly able to answer this question we need to understand the nuances of both loans which can have an overall impact on one’s finances.

Listed below are the five main distinguishing points between a personal loan and a car loan.

1. Ease of sanction – Imagine running from one bank to another to get a loan. This sounds exhausting, doesn’t it? In terms of ease of getting a loan, a car loan is quicker and easier to get when compared to a personal loan. Most banks require a lot of documentation to process a personal loan, with it often taking a long time for it to be sanctioned. On the other hand, most car showrooms have partnerships with banks/finance companies through which one can get the loan sanctioned in no time. This can be easily observed when one walks into a car showroom. This feature goes in favour of the car loan, making it a simpler option.

2. Interest rate – A loan isn’t a gift which is given by banks, it a sum which needs to be repaid, with interest. This interest component varies based on the product on offer. Typically, most banks offer personal loans at a higher rate of interest when compared to car or vehicle loans. While a motor vehicle loan can be availed at rates ranging between 9% and 14% per annum, most personal loans attract an interest in the range of 12% to 20%.

In cases where one is looking to buy a used car, the interest for a used car loan is higher than the interest for a regular loan. Used car loans can have an interest ranging between 14% and 20%, based on the bank.

Note: The interest rate can change from bank to bank and the values mentioned above are an estimate.

3. Tenure – The loan amount taken needs to be repaid over a certain period of time. Most banks offer a repayment period upto 5 years for personal loans, with this being around 8 years for a car loan. The repayment period for a used car loan is typically lower, with banks capping it based on the age of the vehicle.

4. Quantum of loan – With cars priced across different brackets, it is not hard to find a car within a set budget. In case of car loans, most banks are willing to finance anywhere between 50% and 80% of the car cost, with this going upto 100% in certain cases. In case 100% financing isn’t available, a car loan will not be sufficient to purchase the car. This implies that one needs to spend some amount from his/her own pocket. For example, for a car costing Rs.10 lakh, a bank offers 80% financing, or Rs.8 lakh. The remaining Rs.2 lakh needs to be arranged by the individual, which could be a hassle in certain cases.

On the other hand, one can directly approach a bank for a loan of Rs.10 lakh and use this to buy the car. There is no need to pay any amount from one’s own pocket.

5. Collateral – A personal loan is an unsecured loan, meaning that it can be availed without providing any security/collateral. On the other hand, a car loan is a secured loan, which means that the car is the security for the loan. In case one fails to repay this loan, the bank can take possession of the car and sell it to recover their money.

While these five points highlight the basic features of a car loan and a personal loan, the ultimate decision of which loan should be taken boils down to the individual. If one has the down-payment amount and wishes to pay a lower rate of interest then he/she should choose a car loan directly. One can also choose a car loan if he/she has a poor credit score, for getting a car loan sanctioned is far easier than getting a personal loan sanctioned.

On the other hand, an individual who does not have the required sum for down-payment and is OK with paying a tad higher interest can go in for a personal loan. In that case, first, it’s important to check personal loan eligibility criteria and then apply for the loan. Also, if the buyer is purchasing a used vehicle, it makes more sense to go in for a personal loan compared to a used car loan.

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first published:November 28, 2017, 13:18 IST