Should You Take a Personal Loan to Buy a Car?
A Car – an essential commodity for many and a class symbol for others – has become a critical part of our lives now. Enabling transport from point A to point B at any given time, a car is now a staple of all sections of the Indian populace.
As the per capita income increased across the spectrum in India, people started spending more on cars. From Rs. 3 to 4 lakhs, average money spent on cars climbed to Rs. 6 to 7 lakhs in the country. Not only were cars launched in the Rs. 1 to 3 lakh bracket, cars in the Rs. 5 to 10 lakh bracket, cars in the Rs. 11 to 20 lakh bracket and cars with price above Rs. 20 lakhs have been pouring in the market steadily since the beginning of the new millennium.
If you are planning to take a loan to buy a new car, you must have scoured the lending market for suitable car loans. You must then know by now that lenders only fund up to 80% of your car’s cost. If the remaining 20% of your car’s cost is not readily available to you, then you can consider borrowing a personal loan instead of a car loan. To borrow a car loan to buy a car or to borrow a personal loan to buy a car, the answer to this question depends on a lot of factors, let’s go through them below:
1. Collateral: Car loans are secured as the collateral is the car. If you default on your loan, the bank’s going to seize your car. On the other hand, personal loans are not granted against collateral and hence if you buy a car and are unable to pay the loan, the bank won’t be able to seize your car.
2. Interest Rates & Loan Amount: Personal loans have higher interest rates than car loans. The reason obviously being that unsecured loans like personal loans don’t have collateral to back them up, unlike car loans. The loan interest rate you will be servicing in either the personal or the car loan depends on your credit score and credit rating. When buying a car, you certainly would like to fuel it with a lower interest rate. The way to go then can be ‘Good Credit Rating – Personal loan’; ‘Bad Credit Rating – Car Loan’. Why may you be wondering?
A. Good Credit Rating – Personal loan: Well, a car loan lender will only sanction up to 80% of the car’s on-road cost however a personal loan can be availed up till your required amount, i.e. 100% of the car’s on-road cost. If the car’s on-road cost is 8 lakhs Rupees, you will secure a car loan for 80% of 8 lakhs = 6.4 lakhs Rupees. On the other hand, you can just avail a personal loan for 8 lakhs Rupees to cover 100% of your car’s on-road cost.
Thus, with the combo of good credit rating and personal loan you will have two advantages – you will be able to avail the entire cost of your desired car as a loan, that too at a competitive interest rate. People with good credit ratings are eligible for higher loan amount eligibility too so your car’s cost is deemed to be covered under the personal loan umbrella.
B. Bad Credit Rating – Car Loan: As aforementioned, a car loan lies in the category of lower risk loans as they are secured loans whilst this isn’t the case for personal loans. So, if your credit rating is not good and you want to buy a car, a car loan would do the trick for you as competitive interest rates can easily be offered by the lender to a person with bad credit score when the loan is secure (because the lender can seize your vehicle in case you default on your loan). Above that, a person with a low credit score can also get up to 80% of the car’s cost as loan amount through a car loan but not through a personal loan because lenders do not take the risk of granting huge loan amounts to people who have a low credit score and want to avail a personal loan. And if the lenders approve a personal loan with high risk, they do it against a very high-interest rate for the borrower.
Do note that interest rates for car loans currently range from 8.5% to 14% while personal loans are available at interest rates no less than 10.99% and go up to 20%. As aforementioned, interest rates are affected by a lot of factors, most of which are lender-specific; the one which is borrower-specific is the credit rating.
3. Down-Payment: As aforementioned, if you are availing a car loan, you will only get 80% of your car’s cost as loan amount, however, a personal loan can secure for you 100% of your car’s cost. So, if you don’t have the funds to pay 20% of your car’s cost you can go for a personal loan rather than a car loan.
4. Purpose: Who would like to pay heavy interest on the money they borrowed and not be able to spend the money wherever they want? The money you borrow through a car loan can only be used to purchase a car however money borrowed through a personal loan can be spent surely on buying a car but on other things too which you might have your eyes on.
5. Ease of availing: As aforementioned, personal loans are unsecured and thus, difficult to get sanctioned. Lenders are too cautious while lending a personal loan. If you apply for a personal loan when you have a bad credit score, you will be flummoxed by market-high interest rates or your application will be out-rightly rejected since your risk-value is very high. However, a cocktail of low credit score and car loan application won’t force the bank to quote you unheard interest rates. The bank will, relatively easily, approve your car loan. The process to apply for a personal and car loan has been made super-easy by lenders such as banks and non-banking financial companies and you can always inquire about your chances with both by just visiting the bank’s website or a loan aggregator’s website. Personal loans have tougher lending requirements since it is unsecured however car loans’ collateral creates easier lending requirements for its borrowers. Many a time you can make an on-the-spot deal of a car loan right at the car dealers’ place since car dealers’ tie-up with representatives from many top banks and NBFCs to woo their customers and give immediate solutions so that a prospective customer doesn’t leave their shop before buying a car. However, personal loans are not so easily attainable and involve a lot of documentation and background checks. Your personal loan application undergoes stringent scrutiny and only if there aren’t any red flags, the lender approves the loan.
6. Loan tenure: Personal loans and Car loans have a relatively dissimilar range in the loan tenure department. Personal loans usually range from 1-5 years while car loans usually range from 3-8 years. Longer tenure means lower EMI amount and higher interest pay-out for the borrower. On the other hand, shorter loan tenure means higher EMI amount and a lesser interest pay-out for the borrower. Now when it comes to buying the car through a personal loan or a car loan, you as the borrower, would obviously love to get the loan finished ASAP. Especially, if the loan is a personal loan since it has a higher interest rate than a car loan. So, if you are securing a personal loan to buy a car, you should avail a shorter loan tenure to limit your interest-pay out. However, if yours is a car loan which has a lower interest rate and a lower loan amount in comparison to a personal loan, you can keep a relatively longer loan tenure but not which increases your interest pay-out significantly.
7. Title: Since a car loan is a secured loan, the car won’t be bought or transferred in your name until the final installment is paid off by you. Also, you will have to make a down-payment at the onset of the car loan since your car is not 100% financed through a car loan. However, these days, there are 100% financing car loans in the market too but their interest rate is higher or tenure is longer than the regular ones. On the other hand, if you get your car financed through a personal loan, you will get the ownership of your car immediately and no-down-payment from your end is required if you secure the desired loan amount.
To decide whether to avail a personal loan or a car loan to buy a car, you should decide upon this factor – Your ideal total interest pay-out since this figure is a combined result of your ideal loan principal amount, your ideal interest rate, ideal loan tenure and ideal EMI amount. And so you should scour the banks and NBFCs in the market for the best deal so that everything runs in the best possible direction just like your newly-bought car.
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