Right from our very young age, we have heard about car loans as an option to finance our dream vehicle. Right from our parents suggesting to applying for one, the day we want to buy our car all the way to automobile companies regularly promoting their car loan offers, all of us are well accustomed to what a car loan is and how it can help us in financing our dream vehicle. But in recent times, another financial instrument that has gained popularity for being able to finance big purchases is a personal loan. Although the concept of a personal loan is quite new in India, many millennials are going for it, thanks to the easy application process and, moreover, the attractive rates of interest it offers.
If you have been planning to get a vehicle for your family or yourself for some time now and are confused between the choice of a car loan and a personal loan, this article is for you. In today’s article, we will share with you everything you need to know about both these products and hopefully help you in deciding which one will be best suited for you.
Let’s get started.
What Is a Personal Loan?
One of the first and most important aspects you need to be aware of is the meaning of a personal loan. A personal loan can be understood as a short-term unsecured loan of amounts ranging between ₹10,000 to ₹25,000,00, which comes with low and competitive interest rates and also flexible repayment options.
An unsecured loan is any loan that is collateral-free, meaning as a lender, you do not need to pledge any asset or put forward any collateral to avail the loan. Since a personal loan is an unsecured loan, it comes with many advantages, the most significant of which is the fact that you do not have to showcase any asset to reap the benefits of this loan. You can simply apply for a personal loan through a lender of your choice, and within 24 hours, you will have the money in your bank account. Along with this, personal loans also come with flexible repayment options and attractive rates of interest, both of which are often missing from other traditional loans in the market.
What Is a Car Loan?
Now that you know the meaning of a personal loan let us understand the meaning of a car loan. A car loan or a four-wheeler loan is a type of loan which helps you finance the vehicle of your choice by lending you upto 80% on-road price of the vehicle. By taking a car loan, you can pay a minimum down payment, usually about 20% of the vehicle price, and convert the rest into easy monthly installments for the next 12 to 60 months. Car loans in India come attached with a fixed rate of interest and are designed in a way so that the average consumer from all income groups and economic backgrounds are able to buy the vehicle of their choice.
Difference Between a Personal Loan and a Car Loan
Now that you know the meaning of both a car loan and a personal loan let us explore some of the most significant differences between both of these.
One of the first and most important differences between a car loan and a personal loan is the loan amount that you will be able to avail. A car loan in India generally gives you upto 80% of the current on-road price of your vehicle, meaning that the difference amount has to be borne by you in the form of a down payment.
On the other hand, if you take a personal loan to finance your vehicle, you will be able to get the full cost of your vehicle and thus completely eliminate the need to pay a down payment.
One of the main reasons behind this difference in loan amount is the fact that car loans are designed in such a manner so that the owner can take part responsibility for the vehicle from the very first day and also so that a payment discipline can be encouraged among future consumers. However, although this method was planned with a good intention, it quickly became a barrier to many, and thus personal loans were introduced, and the need for a down payment was abolished.
The next difference between a car loan and a personal loan is the rate of interest at which both of them are offered. Car loans in India typically have a very high rate of interest, which ranges between 7 to 12% per annum, meaning that as a borrower, you will have to spend more money in the long run to afford the vehicle of your dreams.
On the other hand, the interest rates for personal loans in India are quite low and affordable. For example, MoneyView, which is one of the leading personal loan lenders in India have the lowest interest rates in the industry of 1.13%, which means that availing a personal loan with low-interest rates will enable you to save more money in the long run.
Secured vs. Unsecured Loan
The third important difference between a car loan and a personal loan is the fact that a car loan is a secured loan by nature, meaning that you have to put forward a collateral or pledge an asset in order to get a car loan. A lot of consumers might not realize this at first glance because a car loan directly doesn’t ask you for collateral when you apply for one.
But when you look into the terms and conditions of a car loan, you will quickly realize that your vehicle is, in fact, the collateral in this scenario, which means that if you fail to pay your car loan due to any reason, your vehicle will be seized and the loan company has the right to sell this vehicle to recover their losses. This process of making the vehicle the collateral for a loan is known as hypothecation, and this practice is prevalent across both four-wheeler as well as two-wheeler loans in India.
On the other hand, you do not need to pledge any asset or put forward any collateral to get a personal loan, meaning that you are the complete and rightful owner of the vehicle from the very first day itself without any complications.
Ending Lines: Which One Should You Choose?
Now that you know the difference between a car loan and a personal loan, the obvious question that must be pondering your mind is which one should you choose?
If you are purchasing a mid-range vehicle within ₹10 to ₹15 lakhs, you will always be better off if you choose a personal loan over a car loan with the obvious reason, being complete ownership of the vehicle and low-interest rates. So go ahead and apply for a personal loan to finance your dream vehicle today. All the best.