When it comes to managing significant purchases, understanding the right financing option can make all the difference. Whether you’re planning to buy a car or cover personal expenses, both car loans and personal loans offer distinct benefits tailored to specific needs. Choosing the right one requires a closer look at their features and how they align with your financial goals. This article explains car finance vs. personal loans and their features.
Let’s explore the key differences between car finance and personal loans to help you make an informed decision:
1. Purpose and flexibility
Personal Loan
A personal loan offers great flexibility, as it can be used for various purposes, such as loan consolidation, medical expenses, home improvement, or overseas vacations. This versatility makes personal loans an attractive option for borrowers who need financial support for multiple or varied reasons.
Car Loan
As the name suggests, car loans are provided by lenders and financial institutions to borrowers to buy a car. A key difference between personal loans and car loans is that the former can be used for various purposes, while the latter is only for purchasing a car.
2. Loan amounts
Personal loan
When comparing personal loans vs car loans, the loan amount for personal loans ranges from Rs. 75,000 to Rs. 35 lakh. You can use this loan to fund any large expense, be it a wedding, vacation, or home makeover. The personal loan amount you receive depends on your creditworthiness, income, and the lender’s policies.
Car Loan
Typically, the cost of the car you wish to purchase will determine the car loan amount. The amount one borrows usually depends on a percentage of the price of the car or the entire cost, depending on your down payment and creditworthiness. Financial institutions typically offer car loans of up to Rs. 50 lakh.
3. Secured vs. Unsecured
Personal Loan
Personal loans are unsecured, which means you don’t have to provide any collateral. These loans also come with flexible repayment options like standard EMIs or step-up EMIs, so you can repay the loan without stressing your finances.
Car Loan
In a car loan, the vehicle you are purchasing acts as collateral. Secured loans usually have lower interest rates because the lender has a claim on your car if you fail to repay the loan. Collateral reduces the lender’s risk, resulting in more favourable terms for the borrower.
4. Interest rates
Personal loan
The interest rate on personal loans is typically higher than car loans since they are unsecured. They charge more interest because lending without collateral is considered riskier. Your credit score, income, and financial health will determine your interest rate. If you have a high credit score, you may get a favourable rate.
Car loan
Car loans have lower interest rates because the car acts as security. The risk for the lender is reduced as they can repossess the car in case of default. Therefore, the interest rates for car loans are relatively competitive, though they depend on the loan term, your credit score, and the lender’s policies. Generally, car loan rates are lower than those for personal loans.
5. Repayment terms
Personal loan
Repayment terms range from a few months to 6 years. This means borrowers can choose the term best suits them, given their financial situation and repayment capacity. When you opt for a shorter term, the monthly payment would be high. Whereas, a longer term results in a lower monthly payment. However, this would increase the total amount of interest paid for the personal loan.
Car loan
This type of loan can be expected to have a fixed-term payment that may take up to seven years. The term affects the monthly payment and the total interest paid during the payback period. The short-term lowers the monthly payment but increases the total amount paid in interest. A long payment period lowers the monthly payment but increases the total interest for the loan’s lifetime.
6. Approval process
Personal loan
Personal loans are typically faster and less strict than car loans. Lenders consider creditworthiness, income, and debt-to-income ratio before approving and determining loan terms. Since personal loans are not secured, the loan application process is primarily based on financial stability and credit history.
Car loan
The key difference between a car loan and a personal loan is that car loans are usually subjected to more thorough checking, that is, the value of the car and your ability to pay. A lender will check your credit history, your income, and the details of the car you are to buy. Since the loan is secured by the car, the value of the car is checked during approval.
7. Financial considerations
Personal loan
Choose a loan by assessing whether flexibility is required and how you will apply the funds. Higher interest may affect monthly payments and total costs for repaying the loan. Ensure that your credit and financial standing meet the loan terms available.
Car loan
Consider the overall cost of ownership in terms of interest rates and a repayment term, as well as how the vehicle will depreciate. While low interest rates make the car loan seem cheap, balancing the monthly payment with your budget and long-term financial goals is also necessary.
Wrapping up
A car loan is specifically designed to help individuals purchase their dream car. It often offers lower interest rates because the car itself serves as collateral. Personal loans, on the other hand, provide flexibility for various expenses but usually come with higher interest rates due to their unsecured nature.
Therefore, when deciding between car loan vs personal loan, carefully compare your financial needs, loan terms, interest rates, and the application process.
With Tata Capital, enjoy the benefits of a structured car loan application process, personified loan packages, and exceptional customer care. Be it short-term expense coverage or purchasing a car; Tata Capital ensures you have the financial backing to make smart decisions.
11 October 2024
5 mins read
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