Should You take a Personal Loan for Buying a Car?
Owning a car can make your commute very easy, especially in big cities where public transport is not very reliable or convenient. Moreover, owning a car does also gives you a feeling of accomplishment.
The cost of a car in India can go up to a few lakh of rupees which may be difficult to buy with your savings/monthly income. So, the purchase of a car is a big decision involving your finances. The most common way out here is taking out an auto loan.
But you may ask if there are any other options available? The answer is Yes, a personal loan can also be considered when you are buying a car.
Let’s explore how.
Difference Between a Car Loan and a Personal Loan
Before we go into deciding on which loan to opt for, it is important to understand the differences between a car loan and a personal loan.
A car loan is a secured loan available against the security of the vehicle that is bought with the loan. This means that the vehicle remains hypothecated or pledged to the lender until the loan is cleared in total.
A Car loan can be used only for the purpose which is availed for, i.e., buying a car. To demonstrate the commitment of the borrower, the lender also mandates a margin amount between 10-25% of the loan amount to be brought in by the borrower.
A personal loan is an unsecured loan that is available without any security. This loan can be used for any purpose like repayment of a high-interest loan, a medical emergency, buying a new or old car/bike, or even funding your school or college fee.
Both these loans are paid back in Equated Monthly Installments.
Factors to Figure When Considering a Personal or Car Loan
Both these loans can pan over several years of repayment. However, considering some factors that matter when getting a loan can help you make a better decision. Some of the important factors that you should consider are:
Your Credit Score
A credit score is an important element that determines either approval or rejection of your loan.
While a good credit score can not only land you approval but also get you loans on favorable terms like a lower rate of interest, lower down payment, etc.
A personal loan may require higher credit scores as it is an unsecured loan, which is riskier for the lender. On the other hand, you could get a car loan at lower grades of credit score as the lender gets the security of your purchased vehicle against the loan.
Kind of Car that You are Looking to Buy
As we talked earlier, cars can range from a few lakh to a few crores as well. Again, there are second-hand cars which might be your choice for a car. Depending on the car you are looking for, either of the loans may suit you.
While a personal loan may not be able to fund a very high-end car, it may work well if you looking to buy a second-hand or a pre-owned car.
Rate of Interest
The rate of interest charged on any loan plays a big part in your decision-making process of choosing one loan over the other. In general, car loans carry a lower rate of interest as these loans are secured. Personal loans, being unsecured have a higher interest rate.
How a Personal Loan can Be Advantageous to You for Buying a Car?
A personal loan brings in a whole lot of advantages to you if you are looking to finance a car with it. They are:
Faster Processing Time: A car loan, being a secured loan comes with its process of processing and approval. It includes getting documents from the car dealer, verifying them all, verification of your income documents, etc.
Whereas, a personal loan, especially from online lenders like Money View involves the least amount of processing and disbursement time as the entire process of availing a personal loan can be done online without any need for hard copies of documents.
No Need for Hypothecation of the Vehicle: When you avail of a car loan, the vehicle remains hypothecated to the lender till the loan is cleared in full. Getting the hypothecation removed from your Car RC book may turn out to be a lengthy process considering the functioning of many government agencies.
By availing of a personal loan for your vehicle purchase, you can forget about this process. The vehicle is your name from day one which might be good if you decide to sell the vehicle within a short period.
Easier End-use of the Loan Amount: When you buy a vehicle, along with the cost of the vehicle, you would also need to bear expenses like registration, accessorizing, and insurance expenses. Many car loans may not cover all the amounts, which means a lot of extra expenses from your end.
With a personal loan, you can cater to all these expenses easily with the loan amount.
No Requirement of Margin Amount: If you need to cough up about 10-25% of the loan amount, it may increase your financial burden. In these cases, opting for a personal loan may prove to the best bet, as it is available without the requirement of any margin or collateral.
Works well even for second-hand cars: Barring a few lenders, getting finance for second-hand or pre-owned cars is difficult. It is because it is difficult to assess the condition and the right market value of second-hand cars.
By going in for a personal loan, you can rest assured that there wouldn’t be any hassles in availing finances for the purchase.
While these were some of the advantages of availing a personal loan for the purchase of a car, you must also give attention to the fact that personal loans are charged a higher rate of interest. Moreover, it might not be possible to finance a high-end car.
A personal loan can be a good choice for buying a car, but this decision should be based upon your credit score, the interest rate that you get from the lender as well as the amount of loan that you are looking for.