Car Loan or Personal Loan for Car: 11 Points to Consider

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There are two funding options available when you want financing for purchase a car – personal loan or car loan. Basically both are personal loan only.

But there are two fundamental differences between the two in technical terms as follows:

  • Car loan can be used only for purchasing car (new or second hand). Whereas personal loan can be used for any purpose and there is no restriction on spend. E.g. modifying the car, add new accessories, etc.
  • In case of auto loan, vehicle is in the custody of the lender. And till the time, repayment is fully done, it remains in their custody. But in case of personal loan, the car will remain in the borrower’s name. This is because, this type of loan is an unsecured loan. i.e. lender do not ask for any collateral.

Due to the above two fundamental differences, what should be preferred when buying a car – personal or vehicle loan? The answer to this question depends on the benefits and cons of each.

Let’s understand this in detail below:

1. Loan amount: In case of car loan, the amount of finance offered is equal to the cost of the car. However in case of personal loan, you can even get higher sum depending on the evaluation done by the bank. And this money can be used for buying any car. In fact, if you are eligible to get higher sum; you can even purchase multiple vehicles.

2. Money saving on the interest: The most important factor to be considered when taking any type of credit, is the interest rate. If this is low, then you will save good amount of money. Personal loan rates are in the range of 11%-24% and 8%-11% in case of car loan. With such a high difference between the interest rates; auto loan is a clearly a big money saving option. And if you are an honest borrower; taking a car loan should not be a problem even if car is under the control of the lender for some period. One way to save money on interest rate, in case of personal loan is to get it against securities such as fixed deposit, LIC policy, mutual funds and others.

Check out when to prefer personal loan for used car.

3. Poor credit score: If your score is poor due to past financial mistakes, then getting a personal loan will be difficult. Although there are other ways to get personal loan when score is poor. But you are more likely to get car loan, since your vehicle will be kept as collateral with the bank.

4. No credit score: There are many individuals, who have not taken any form of credit before. And even if they are earning good income, their credit score is not available at CIBIL. For such individuals, with no CIBIL score at all; taking a loan and regular repayment becomes an opportunity to start building credit score.

5. Building credit: If you get car loan when the credit score is bad; then it becomes an opportunity to rebuild the credit rating.

6. Down payment: No down payment is required in case of personal loan; whereas for car, down payment is must.

7. Used car: Personal loan can be used for purchasing second hand four wheeler. But very few lenders offer car loan for second hand car. Even if they do, the loan amount is calculated mainly on the basis of age of the car and depreciation value. So the finance offered is less than the actual value of the car. If the car is too old, then lender may not even offer auto loan. In this case, personal loan is the best solution. However careful evaluation will be required to calculate the actual amount you will end up paying on the interest. It should not be higher than the total cost of the second hand car.

8. Modifying and repairing the car: If vehicle modification is your objective after buying, then personal loan is the only option. You can use this money to modify the car as per your choice. Car loan cannot be used for repair. And car belongs to the bank, until you pay-off all the EMI. But in case of personal loan, car remains on your name.

9. Changes in RC book i.e. hypothecation removal: When auto loan is taken, the car is in the name of the lender. Even after the loan amount is fully repaid, it remains in the name of the lender until you get NOC from the bank. You have to then visit RTO and get the name financiers name replaced with yours. There is a small fee involved for removal of hypothecation. This is a very complicated process. No reasons required, when the name RTO comes up:)

Read more on car loan for low income earner.

10. Name change in insurance policy: You will have to also visit insurance company and show NOC from the bank and then get name changed in the policy document. This reads very simple but is a very painful and time consuming process. Moreover between complete loan repayment and changing name in the policy document, if any damage happens to the car, then claim process becomes very complicated.

11. Selling car during loan term: If you wish to sell the car during the tenure of the car loan, you cannot do it easily. This is because, the car is in the name of the financial institution who lent the money. You will have to first pay-off the entire loan amount, then only vehicle can be sold. This is not the case with personal loan. You can sell it anytime.

So prefer car loan when:

  1. You want to save money on interest
  2. No modification is required
  3. Personal loan is rejected
  4. Improve poor credit score
  5. Start building credit score when there is no score at all

Prefer personal loan for vehicle financing when:

  1. Higher loan amount is required
  2. You want to keep car in self-custody
  3. Modify the car
  4. Buy car accessories
  5. You do not have money to make a down payment
  6. You want to buy used car
  7. You want to avoid painful process of changing name in RC book and insurance document.
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