Often, decisions about a financial product are difficult. People do not know what to do when they choose one of the two borrowing options available. If you are planning to buy a new car, you can take out an auto loan or a personal loan to buy your vehicle.
A personal loan is an unsecured loan, while a car loan is a secured loan because your vehicle is mortgaged to the bank until you repay your loan to the lender in full. The personal loan amount varies depending on your monthly income, credit score, employment status, etc.
On the other hand, auto loans are taken out against the vehicle you wish to purchase. For example, if you are planning to buy a car worth Rs 15 lakh and you want to borrow Rs 12 lakh as a loan, the lender will consider the value of your car along with your monthly salary and score. credit. If everything is in order, the lender will sanction the loan for you.
Many lenders offer you up to 90% of the total cost of the vehicle, but some may even offer you a 100% loan if your income and credit history are intact.
Also Read: What Happens When You Default on 3 Consecutive Home Loan EMIs?
The significant difference between an auto loan and a personal loan is the requirement of an asset to obtain funds. For unsecured loans like personal loans, you don’t need collateral like a car, property, or gold to borrow money. If you default on the secured loans, the lender has the legal right to auction off your property/car and collect the dues.
Borrowers should remember that both loans are available quickly without physically going to banks. They can apply for the loan online and get the same disbursement if their financial records comply with the bank’s terms and conditions.
It is important to note that the interest rate may differ in the case of personal loans. Personal loans generally charge a higher interest rate, while auto loans are available at a lower interest rate because your property is mortgaged to the lender as collateral.
There is a high risk for the lender when he lends you money without collateral. The risk factor involved makes personal loans expensive. Personal loans can be used to buy a car in case you are not eligible to borrow the amount you need through a car loan. A personal loan can help you borrow a higher amount to pay even the 100% value of your vehicle, but you should check your repayment capacity before applying for such loans. Your credit score plays an important role when borrowing a personal loan, according to BankBazaar.com.
Also read: Want to improve your eligibility for a personal loan? Follow these 4 tips
A car loan is a good option if you can get the loan amount you need quickly. Your interest rate will be lower and you can repay what you borrow through EMIs. Even if your credit score is not very high, you can still get a car loan because the vehicle will serve as collateral with the lender.
Borrowers should pay attention to loan terms for both car loans and personal loans and compare interest rates from different lenders to get the best deal. You can use EMI calculators for auto and personal loans to clarify EMIs.
The table below helps you compare car and personal loans as well as interest rates and EMIs on the loan amount of Rs 10 lakh for five years.
Auto Loan vs Personal Loan – Comparison of Interest Rates
EMI on New Car Loan and Personal Loan Compared Assuming Loan Amount of Rs 10 Lakh for 5 Year Term
Compiled by BankBazaar.com
Note: Lowest interest rate on auto and personal loans for all listed public and private banks (BSEs) considered for data compilation (excluding small financial banks and EV loans); Banks whose data is not available on their website are not taken into account. Data collected from the respective bank’s website as of September 20, 2022. Banks are listed in ascending order based on car loan interest rate, i.e. the bank offering the interest rate the lowest on the car loan is placed at the top and the highest at the bottom. The lowest interest rate offered by banks, regardless of the loan amount, is shown in the table. The EMI is calculated on the basis of the interest rate mentioned in the table for the Rs 10 Lakh loan with a tenor of 5 years (processing fees and the like are assumed to be zero for the calculation of the EMI); The interest mentioned in the table is indicative and may vary depending on the general conditions of the bank.