Are you looking to purchase a new car on finance, but are confused about which loan type to choose? For any automobile buyer, there is always an option of taking a personal loan instead of a car loan. While it is good to have choices, it can also be confusing if you are new to the game.
To help sort through the confusion, check out the differences between the two with the help of the following table.
Personal Loan
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Car Loan
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This is an unsecured loan, meaning, borrowers need not put down any collateral before applying for finance.
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This is a secured loan, which implies to avail this car finance, borrowers need to hypothecate their vehicle to the bank until the loan is paid in full.
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Personal loans generally have a much higher rate of interest (from 10.75% - only for eligible customers in Category-A Banks) as opposed to a car loan.
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Car loans usually have a lower interest rate (range between 8% - 11% depends upon the profile).
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Given this is an unsecured loan, availing it is more challenging. Lending institutions will sanction personal finance only if potential borrowers have a good CIBIL score, profitable business, stable income, etc.
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Given this is a secured loan, where the vehicle itself acts as a collateral, banks offer it more easily. However, the borrower’s CIBIL score matters here to some extent.
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Borrowers can apply for this loan type online and also choose from a host of fixed or flexible tenure and repayment options. Usually, the term for a personal loan is between 1 to 5 years.
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Borrowers can apply for this loan type online and choose form flexible tenure and repayment options; however, the loan tenure here is between 1 to 7 years.
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Loan sanction time is between 3 – 4 days after submission of proper documents and verification.
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Loan sanction time is between 24 hrs – 48 hrs based on the speedy document submission by the customer.
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EMI stands as a fixed value.
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Various repayment schemes available in car loan- from vanilla scheme to various customised schemes like a) Step up – step down scheme b) low EMI scheme c) balloon/bullet repayment option d) moratorium options of 30-60 days.
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A personal loan can cover 100% cost of the vehicle as it is an amount, one applies for without disclosing the end-purpose.
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A car loan usually covers between 80% - 100% on ex-showroom cost of the vehicle, however in few instance based on the profile and income criteria of the customer the financier institution extends up to 100% of the on-road cost of the vehicles and however the rest has to be paid by the customer.
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While sanctioning a personal loan, a bank does not demand the borrower to reveal their end-purpose. They can buy a car or renovate their home, take care of medical bills or do it all together.
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Since the end use is purchase of a car – the financial institution directly disburses the fund into the dealers account.
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Example: Assume you need personal loan to buy a car worth Rs 5 Lakhs for 5 years’ tenure.
Consider you have good CIBIL & financial background. Average interest rate would be 11% and EMI: Rs 10,871 with total interest of Rs 1,52,273.
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Example: Assume you need car loan to buy a car worth Rs 5 Lakhs for 5 years’ tenure. Consider you have good CIBIL & financial background. Average interest rate would be 8.25% and EMI: Rs 10,198 with total interest of Rs 1,11,888.
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In addition, you can also take advantage of specific offers, discounts and benefits extended by the manufacturer (OEM), the distributor/dealer or the financial institution on buying a financed car. In essence, since car loans, as a product, is specifically curated to cater to customer needs to buy a car, it might be more beneficial to opt for a car loan where you qualify for it.
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