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Personal Loans vs Car Loans: What's the Difference?

11/9/2021

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If you want to buy anything big, like a car, you may need to take out a loan to pay for it. Personal and car loans are two of the most common financing options, and they can be rather simple to obtain if you match the lending criteria.
So, what exactly is the distinction between the two?

​Key distinctions between car loans and personal loans

The first major distinction between a car loan and a personal loan is that a car loan is typically secured, with the car serving as collateral. As a result, most car loans are for new or very new vehicles. You can receive an unsecured vehicle loan, but it will usually come with a considerably higher interest rate due to the lender's greater risk.
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Any personal loan allows you to borrow money for various reasons, including funding a vacation, a car, home improvements, or debt consolidation. While you may need to explain the purpose of the purchase – in this case, purchasing a car - you may be able to borrow more than the car costs and put the additional money towards another purchase or improve your cash flow (provided you can meet the repayments). Loans can be unsecured or insured, and they can have a fixed or variable interest rate.

When to get auto loans?

Auto loans are the most affordable option to finance a new or used car. Some lenders and dealerships may not require a down payment, but you will get a better rate if you do.
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These loans are usually used to buy out a lease. You may potentially qualify for a cheaper rate if you have been paying on time for a year or more and your credit has improved.
Key Features
  • It can only be used to buy a car, and the car is used as collateral for the loan.
  • The lender owns the car until the loan is fully repaid.
  • The sum is limited to 80-90% of the car's cost.
  • A 10%-20% down payment is required.
  • 7-year tenure possible.
  • As a secured loan, it can be obtained with bad credit.
  • Banks and NBFCs.
Benefits of Getting a Car Loan
  • Affordability
  • Easy to get
​Cons of Getting a Car Loan
  • Can't borrow for all cars
  • Need a deposit
  • The bank can seize your car
  • Car insurance is required

When do personal loans work best?

When borrowers don't want to put down payment and are willing to pay a higher rate for unsecured funds, it calls for acquiring a personal loan.
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Unlike an auto loan, a personal loan does not burden your vehicle, allowing you to sell it before paying it off.
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​Key Features
  • Unsecured loans
  • Short tenure
  • No need to pledge any assets to get the loan.
  • Available through online lenders, banks, and NBFCs.
  • Simple docs.
  • Higher interest rates than secured loans.
  • Useful for any purpose.
Benefits of buying a car with a Personal Loan 
  • No deposit.
  • Minimal risk of repossession.
  • Less limiting.
Cons of buying a car with a Personal Loan:
  • Much more costly.

Which is right for you?

Pre-qualify for a vehicle loan or personal loan by asking yourself these questions:
Do I know my car?
Before granting you a car loan, a lender may want to know all about the vehicle. They may ask for the manufacturer, model, VIN, and even the color. You can receive a car loan if you have these facts. A personal loan may be better suitable if you merely want a loan and then go automobile shopping.
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If you still want a car loan and want to go car shopping, apply for pre-approval. No assurance, but it indicates how much the lender will finance you when you return with your desired vehicle.
Is it a new or used car?
For example, some lenders won't allow you to buy a used car, while others accept up to five years old. A personal loan may be more likely to be approved for a used or older car.
How secure will my finances be during the loan term?
Personal and auto loans normally range from one to five years but can go up to seven. If you have a consistent income and your circumstances are unlikely to change, a car loan may be better than a personal loan. A car loan frequently has fixed repayments, making it easier to budget for that period.
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A personal loan may be more suited if you know your situation will change, such as having a child or buying a property. Personal loans are often more flexible, so you can make bigger payments for a year or two before returning to the minimum. Personal loans rarely charge for late payments, although car loans frequently do.
Do I need to borrow more than the automobile is worth?
If you're a head turner, you may want to customize your new wheels. If you can't afford it and need a loan, a car loan is unlikely to help. Car loans are just for the purchase of a vehicle, which is why approval is so strict. Personal loans aren't usually tied to specific items, so you can borrow $5,000 more than the car's worth and put a dirty subwoofer in the boot.
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