Personal Loan vs Car Loan: What is the difference?

When you're arranging funds to buy a vehicle, you must look at your options closely. Knowing the difference between a Car Loan and a Personal Loan is important. This decision not only influences your financial health in the short term but also impacts your budget and savings in the long run. Both Personal Loans and Car Loans come with their unique set of advantages, tailored to meet diverse financial circumstances and goals.

Difference between Personal Loan and Car Loan

1. Loan amount
The flexibility in loan amounts with Personal Loans can significantly benefit borrowers looking for additional funds to cover not just the car, but also insurance, taxes, and any upgrades, making it an all-encompassing financial solution. Car Loans are more restrictive, focussing solely on the vehicle's cost, thereby ensuring borrowers don't overextend on the purchase.

2. Interest rate
The interest rates for Axis Bank's Personal Loans start at 10.75% p.a. and are determined by various factors, including credit score, income level, and existing debts. Car Loans, by securing the loan against the vehicle, often offer lower and fixed interest rates that are less influenced by individual credit factors, providing a more stable and predictable loan cost over time.

3. Repayment tenure
The choice of tenure in Personal Loans ranges from 12 to 84 months and offers borrowers to balance their repayment schedule and monthly budget. They can opt for a longer tenure to reduce EMIs. For Axis Bank Car Loans, the longer tenure options such as seven years, can help spread out the cost of higher-value vehicles, making higher-end cars more accessible to a broader range of buyers.

Should I take a Personal Loan to buy a car?

Loan amount and rate of interest
If you're eyeing a vehicle that's just outside your budget, a Personal Loan can bridge that gap, offering amounts that can cover the full price of the car and more. However, the catch lies in the interest rates; since Personal Loans are unsecured, the rates are higher than those of Car Loans.
Purpose of availing the loan
A Personal Loan gives you the liberty to use the funds for multiple purposes in addition to purchasing a vehicle. This can include covering insurance costs, modifications, or even non-car-related expenses. If your intention for the loan extends beyond just acquiring a vehicle, the versatility of a Personal Loan is highly beneficial.
Tenure of the loan
The tenure of a Personal Loan can greatly affect your financial planning. With options usually up to seven years, (sometimes more) you have the flexibility to choose a repayment plan that suits your needs. However, a longer tenure means paying more interest overall. Consider your long-term financial health and how it aligns with the loan's repayment period before deciding.
Ownership of the vehicle
Opting for a Personal Loan means immediate ownership of the vehicle, as the loan isn't secured against it. This freedom is enticing for many, especially if you plan to customise the vehicle or are concerned about the implications of a secured loan, such as the potential for repossession. Immediate ownership also means you can sell the car any time, giving you financial flexibility that a Car Loan might not offer.
Procedure for availing Personal Loans and Car Loans
When it comes to Personal Loans, the appeal lies in their streamlined application process. Typically, these loans demand less documentation, which can include proof of income, identity verification, and credit history, leading to faster approvals. This efficiency makes Personal Loans a more attractive option compared to Car Loans.

Pros and Cons of Personal Loan

Pros	Cons
Flexibility in use: Can be used for a wide range of personal needs beyond car financing.	Higher interest rates: Generally, it carries higher interest rates due to being unsecured.
No collateral required: Borrowers don't need to secure the loan against an asset.	Impact on credit score: Requires a good credit score for favourable terms.
Fixed repayment terms: Offers clear budgeting with fixed monthly payments.	Possible higher monthly payments: Shorter repayment terms can mean higher monthly outgoings.

Pros and Cons of Car Loan

Pros	Cons
Lower interest rates: Typically offers lower rates as the loan is secured against the vehicle.	Vehicle as collateral: Risk of losing the car if you default on the loan.
Longer tenure options: Potentially lower monthly payments spread over a longer term.	Restrictions on use: The loan is specifically for car purchases.
May improve credit: Making regular payments can positively impact your credit score.	Depreciation: The car's value may decrease faster than the loan is paid off.

Also Read: Instant Personal Loan without documents: Eligibility, benefits & steps to apply

FAQs

Can you use a Personal Loan to buy a car?

Yes, a Personal Loan can be used to purchase a car.

Is it better to get a Personal Loan to pay for a car?

A Car Loan is designed to finance only the purchase of your car, while a Personal Loan can cost other expenses such as the insurance and other fittings.

Which loan is better: Auto Loan or Personal Loan?

The better loan depends on your needs, with Car Loans typically offering lower rates and Personal Loans providing greater flexibility.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.