Personal Loans vs. Car Loans: Key Differences Explained

Purchasing a car is one of the major milestones in one’s life. However, making an upfront cash payment is not always a feasible option. In such cases, the need for some financial assistance arises. Currently, there are a number of options available in the market that you can choose from to fund your vehicle purchase. Car loans and personal loans are the two most commonly used ones, and buyers usually find themselves confused between these two financing options. Since both the loan types have their own unique advantages, one should always opt for a loan type that suits his/her financial needs.

Table of Content

• An Overview
• Personal Loan vs. Car Loan

This blog explores the key benefits of personal loans and car loans as well as the major differences between them:

An Overview

A personal loan is a type of unsecured loan that you can obtain to get quick access to funds. From financing a vehicle purchase to paying for higher education, covering wedding expenses to business expansion, these loans can be availed for a variety of reasons. In this financing option, the loan amount is determined depending on a number of factors, such as the monthly income, credit history, repayment capacity, etc.

A car loan, on the other hand, is a financing option that is specifically designed to fund a car purchase. Unlike personal loans, car loans are secured, and the vehicle you purchase serves as collateral for the lender. If you have a steady source of income, you are eligible for a car loan. However, these loans do not cover the complete cost of your car. In most cases, a loan can be availed for up to 80% of the vehicle cost, and the remaining 20% needs to be paid by you.

Currently, there are a number of lending institutions (banks and NBFCs) that offer hassle-free personal loans and car loans.

Personal Loan vs. Car Loan

Although the major difference between a personal loan and a car loan is collateral, there are several other points. Here is a detailed comparison of these two types of loans, depending on several factors:

Eligibility Criteria

Since car loans are secured loans, backed by collateral, they have a more flexible eligibility criteria as compared to personal loans. Although you need a good credit history for both of these loans, the terms and conditions for loan approval are less stringent for car loans. Personal loans, on the other hand, have more complex documentation requirements.

Loan Amount

The amount you can obtain using a car loan majorly depends on the total cost of the vehicle. Generally, you can avail a loan of up to 80% of the on-road price of your car. But with a personal loan, there is no limit on the amount you can get. The key determinants are your monthly income and repayment capacity.

Rate of Interest

Car loans usually have a lower rate of interest than personal loans. Since there is no collateral involved, personal loans require you to pay a larger amount in the form of interest. However, the interest rate applicable on a personal loan can also vary from one buyer to another. For instance, if you have a good credit score and are applying for a shorter tenure, the interest rate will be lower.

Repayment Tenure

Personal loans offer a great amount of flexibility, in terms of repayment tenure. Generally, the loan tenure ranges from 12 to 84 months, and you can make a choice as per your convenience. If you want to reduce the EMI amount, you can opt for a longer tenure. Car loans, on the other hand, are available with a minimum tenure of 5-7 years. However, you can always make a partial payment at any point of the loan tenure.

Fund-usage Flexibility

Car loans are obtained to finance vehicle purchases, and you can use the funds only for that purpose. Personal loans, on the other hand, give you complete freedom to use the funds as per your requirements. Other than paying for the car, you can also pay for things like insurance coverage, car modifications, or any other non-car-related expenses. So, if your financial needs extend beyond just acquiring a vehicle, personal loan is an excellent choice for you.

Conclusion

In conclusion, the choice between a personal loan and a vehicle loan depends upon the unique financial requirements and circumstances of an individual. At Muthoot Finance, we offer car loans and personal loans, both at highly competitive interest rates. For more information, you can either reach out to us online or visit your nearest Muthoot Finance branch.