Personal Loan vs Car Loan – Which is Better and Why?

By Hafiz Mueen

When it comes to financing the purchase of a car, there are usually two front runners in the running: a Personal Loan or a Car Loan, strictly for that purpose. Both have their advantages and considerations and certain features that best fit specific financial needs. This blog will walk you through the intricacies of both loans so that you can make an informed decision that will be in line with your financial goals.

Car Loans

A Car Loan is a specific type of financial product meant for car purchases only. The loans offer specific features tailored to car buyers, hence gaining much popularity among people aspiring to own cars.

Car Loans Key Features:

Specific purpose

Car Loans are meant strictly for vehicle purchase; therefore, they will not divert to other purposes. Being a secured loan, the car acts as collateral.

Reasonable interest rates

The interest rates offered by Car Loans are generally lower compared to Personal Loans. This is one of the options selected by buyers searching for borrowing costs, where costs must be minimized.

Long Loan Tenures

Car Loans may have a loan tenure of up to seven years, allowing repayments to spread over a more manageable length of time.

Security

Considering that the car itself is offered as collateral, the lender's capability to offer good terms and competitive pricing improves.

Personal Loans

Personal Loans are versatile and do not have any pre-defined purpose for which the loans must be put to use. They have the freedom for the borrower to utilize the funds as intended.

Key Characteristics of Personal Loans:

Purpose and Flexibility

Since Personal Loans are unsecured loans, no security is required, and can be used for a variety of financial needs, including car buying.

Interest Rates

The interest rates on Personal Loans are relatively higher than those on Car Loans, which reflects the unsecured nature of these loans.

Shorter Loan Tenures

Personal Loans usually have shorter tenures, between one and seven years. Though shorter terms ensure quicker repayment, it often results in higher monthly installments.

Eligibility Criteria

Lenders consider credit score, income, and job stability when approving Personal Loan applications. These are among the most influential factors in determining loan approval.

Personal Loans vs. Car Loans

Knowing the distinction between Personal Loans and Car Loans is important for choosing which one better suits your requirements.

1. Purpose of the Loan

Personal Loan: It provides flexibility and can be used for various purposes.

Car Loan: A loan can only be used to buy a car.

2. Interest Rates

Personal Loan: Generally higher interest rates.

Car Loan: Lower rates due to the secured nature of the loan.

3. Loan Tenure

Personal Loan: Shorter tenures with quicker repayment.

Car Loan: Longer tenures for reduced monthly installments.

4. Collateral Requirement

Personal Loan: No collateral required.

Car Loan: The car serves as collateral, reducing risk for the lender.

5. Eligibility Criteria

Personal Loan: Based on creditworthiness, income, and employment stability.

Car Loan: Simplified eligibility criteria, often geared towards car buyers.

Factors to Consider

While both the options have their pros, here are a few more considerations to make your decision:

Tax Advantages

Car Loans may provide tax benefits if you use the car for business. Personal Loans rarely do. For this, you need to consult with a tax advisor to understand how much you would be eligible to claim as deductions.

Prepayment Charges

Review the prepayment and foreclosure charges associated with each loan type. Some lenders may have stringent policies, so understanding these charges upfront is essential.

Loan Processing Time

Personal Loans typically have faster processing times since they do not require collateral. Car Loans may involve additional verification, impacting the approval timeline.

Loan Amount and Down Payment

While Personal Loans app can offer a higher lump sum, Car Loans typically require a considerable down payment. Analyze your ability to pay for such upfront costs.

Interest Rate Volatility

Interest rates may either be fixed or floating. If you know which of these applies to your loan, you can better anticipate future changes in your repayments.

Choosing the Right One

The decision between a Personal Loan and a Car Loan will depend on your priorities and circumstances about your finances.

Choose a Personal Loan if:

You want flexibility and need money for multiple purposes other than purchasing a car.

Choose a Car Loan if:

You primarily want to fund a car purchase and prefer lower interest rates with longer repayment tenures.

Choose Stashfin As Your Ideal Loan Partner

When it comes to managing your financial needs, Stashfin has an all-inclusive solution with its instant loans of up to Rs.5 lakhs. Be it a Personal Loan or a Car Loan, Stashfin has unparalleled benefits that include an interest-free credit period for up to 30 days, paying interest only on the amount utilized, and a flexible tenure of up to 36 months.

With Stashfin's hassle-free application process and transparent policies, securing the funds you need has never been easier.