Personal loan can be a good option for buying a car, but it makes sense only in certain circumstances. However, car loans are also a better option for such deals. If you want to deal with a better loan option for buying a car, then you can go ahead to buy a car by knowing the advantages and disadvantages of both personal loan and car loan.
What are the benefits
One of the major benefits of a personal loan for buying a car is flexibility. When a personal loan is used for long-term investment, the car buyer does not have to visit the showroom for procedures like finance approval as is the case with a car loan. Also, a personal loan is bound by the rules of a car loan.
In case of personal loan, it is not necessary to buy a new car. With the help of personal loan, the buyer can also deal with a private seller for an old car. By doing this, he can also save money. Apart from this, if you get a good offer from a private seller and you need to take a quick decision, then you can do so.
Applying for a personal loan instead of waiting for car loan approval can speed up the process. Personal loans take less time to get approved than a car loan. If you get a good offer from a private seller, you can easily buy a used car with the help of a personal loan.
interest rates may be reduced
When it comes to choosing between a personal loan and a car loan for buying a car, the credit score matters a lot. Personal loans usually have higher interest rates than car loans. If the car buyer has a good credit score, personal loans can be available at a lower rate than car loans.
If you are eligible to fulfill all the conditions of the bank or financial institution, then personal loans can be approved in less time as compared to auto loans. In personal loans, nothing has to be pledged and this loan is considered unsecured. In personal loans, the bank or financial institution has to do a systematic assessment. On the other hand, in car loans, the financial institution or bank uses the vehicle as collateral, that is, in a car loan, the vehicle itself is pledged as security. For this, additional steps are required to determine the value and condition of the vehicle. For example, if you want to buy a car worth Rs 15 lakh, then banks easily provide a loan equal to 80-90 percent of this price. But for this, you should have the ability to pay the installment. On the other hand, if you want to take a personal loan, then the bank or financial institution does not have anything as security. They have to give the loan only by looking at your credit history and ability to repay the loan i.e. income.
Pre-qualification will take less time to get your loan approved based on a soft credit check. It will have no impact on your credit score and it is possible for the bank or financial institution to expedite the final approval process after you formally apply for pre-qualification.
What are the disadvantages
higher interest rates
The interest rates on personal loans are higher than those on car loans. Car loan is a secured loan. In this, the car remains mortgaged with the bank until the loan is fully repaid. If the buyer does not repay the loan on time, the bank or financial institution can seize the car. This is the reason why the risk for the bank is reduced. On the other hand, personal loan is an unsecured loan. Which means that the bank or financial institution does not have anything as security. As a result, the risk of the bank increases and the interest rates on such loans are high.
While giving a personal loan, any financial institution takes into account the monthly income and credit score of the person applying. While giving a car loan, apart from these things, the price of the car is also considered. Compared to a car loan, the repayment period of a personal loan is often shorter. Even if the total loan amount is equal to a car loan, it means that the monthly installment in a personal loan will be higher. Personal loans are often used to pay for unexpected expenses for which a shorter repayment period may be more beneficial. Cars are meant to last for many years, so taking a long-term loan can reduce the monthly installment.
Unsecured Loans
Unlike car loans, personal loans are not secured. If you fail to repay the personal loan on time, the bank or financial institution seizes the ownership of the car. A car loan is a secured one. This indicates that the car acts as collateral for the loan. If you do not make your payments, the bank or financial institution has the right to sell the pledged vehicle to recoup its losses.
There is no collateral requirement for personal loans. Due to the lack of any tangible asset to seize in case of default, the bank or financial institution takes on additional risk. Since personal loans are unsecured, their interest rates are higher than auto loans.
This suggests that in the event of a personal loan default, the lender may adopt further debt recovery strategies, such as contacting you to arrange a repayment schedule or notifying the credit bureaus about the default, both of which have the potential to severely lower your credit score.
If you want flexibility in your search and a faster approval process, and have a good credit score, a personal loan is a better option for buying a car. But keep in mind that the interest rates on personal loans can be higher and the repayment period shorter than a car loan. It is advisable to read the terms and conditions carefully from wherever you are taking the loan.