Often decisions about a financial product are tough ones. People get confused about what they should do when choosing one of the two available borrowing options. If you plan to buy a new car, you can take a car loan or a personal loan to purchase your vehicle.
A personal loan is an unsecured loan, whereas a car loan is a secured loan as your vehicle is mortgaged to the bank till you fully repay your loan to the lender. The personal loan amount varies depending on your monthly income, credit score, employment status etc.
On the other hand, car loans are taken against the vehicle you wish to purchase. For example, if you are planning to buy a car worth Rs 15 lakh and you want to borrow Rs 12 lakh as a loan, the lender will consider your car value along with your monthly salary and credit score. If everything is in order, the lender will sanction the loan to you.
Many lenders offer you up to 90% of the total cost of the vehicle, but some may even offer you a 100% loan if your income and credit records are intact.
The significant difference between a car loan and a personal loan is the requirement of an asset for getting funds. For unsecured loans like personal loans, you don’t need collateral such as a car, property, or gold to borrow the money. If you default on secured loans, the lender enjoys legal rights to auction your property/car and recover the dues.
Borrowers must remember that both the loans are quickly available without physically visiting banks. They can apply for the loan online and get the same disbursed if their financial records comply with the bank’s terms and conditions.
It is important to note that the interest rate may differ in the case of personal loans. Personal loans typically charge a higher interest rate, whereas car loans are available at a lower interest rate as your asset is mortgaged to the lender as collateral.
There is a high risk for the lender when it lends money to you without security. The risk factor involved makes personal loans expensive. Personal loans can be used to buy a car in case you are not eligible to borrow the amount you need through a car loan. A personal loan can help you borrow a higher amount to pay even the 100% value of your vehicle, but you must check your repayment capacity before applying for such loans. Your credit score plays an important role when you borrow a personal loan, according to BankBazaar.com.
A car loan is a good option if you quickly get the loan amount you need. Your interest rate will be lower, and you can repay what you borrow through EMIs. Even if your credit score is not very high, you can still get a car loan, as the vehicle will act as a collateral with the lender.
Borrowers must pay attention to the loan terms and conditions, both in the case of car loans and personal loans and compare the interest rates of different lenders to get the best deal. You can use the EMI calculators for both car and personal loans to have clarity on EMIs.
The table below helps you compare car and personal loans along with the interest rates and EMIs on the loan amount of Rs 10 lakh for five years.
Car Loan Vs Personal Loan – Interest Rate Comparison
EMI on New Car Loan and Personal Loan Compared Assuming Loan Amount of Rs 10 Lakh for 5-Year Tenure
Compiled by BankBazaar.com
Note: Lowest interest rate on Car and Personal Loan for all listed (BSE) Public & Pvt Banks considered for data compilation (Excluding small finance banks and EV loan); Banks for which data is not available on their website are not considered. Data collected from respective bank’s website as on 20 Sep 2022. Banks are listed in ascending order on the basis of Car loan interest rate i.e. bank offering the lowest interest rate on Car loan is placed at top and highest at the bottom. Lowest interest rate offered by the banks irrespective of the loan amount is shown in the table. EMI is calculated on the basis of interest rate mentioned in the table for Rs 10 Lakh Loan with a tenure of 5 years (processing and other charges are assumed to be zero for EMI calculation); Interest mentioned in the table is indicative and it may vary depending on the bank’s T&C.