Personal Loans Vs Car Loans – What’s The Difference

If you’re looking to make a major purchase or investment like purchase a flat, a vehicle or wish to fund any high ticket expense, then, a loan is one of the wisest options to take. When it comes to seeking financial aid in order to take care of expenses, personal loans are car loans are among the top preferred options. Both these types of loans are easy to obtain, given that they do not carry extensive or stringent eligibility requirements. To provide added convenience to customers, many banks and lending institutions now allow you to apply for personal loan or car loan via their website, where the loan is usually approved within a short time, assuming that the customer meets the eligibility criteria.  

As the names suggest, personal loans and car loans are quite distinct from each other, primarily in terms of the need or financial requirement which they fulfill. Personal loans can be taken to address a number of personal financial needs, expected or unexpected. Personal loans can be taken to fund a wedding or any social function which may have to be arranged in the family, to pay coaching classes tuition fee, to fund a family vacation, to re-furnish the interiors of your house, to fund the cost of an emergency medical treatment, to repay long-standing debts, etc.

A car loan, however, can only be taken to purchase a new or a second hand car, depending on the loan. If you wish to purchase a car, a car loan is the most appropriate loan which is designed for this purpose. Following are some of the terms of difference between car loans and personal loans, which will help you distinguish between the two and make an informed decision.

Personal Loans (Unsecured)

A personal loan is a loan which is taken to address financial needs of a personal nature. These may be expected or unexpected requirements which may arise with time or suddenly. For a personal loan, the borrower is provided with funds by a bank or a non-banking finance company. The entire loan amount is paid by the lender and can be used by the borrower as per their discretion.

Personal loans are available in two types, secured and unsecured. A secured personal loan is provided against a security which holds certain value. If the borrower fails to pay the loan, the lender may seize the item which has been pledged as security against the loan in order to cover the loss. The other type is an unsecured personal loan where the loan is provided without the borrower having to pledge anything as security or collateral against the loan.

Interest Rates

Unsecured personal loans carry significantly higher rates of interest, as compared to secured personal loans which require a collateral to be provided. Additionally, unsecured loans are accompanied by far stricter eligibility requirements, which usually require the borrower to hold a near excellent credit history. If you do not have a healthy credit history, getting a personal loan may be difficult. For personal loans, the amount of loan provided and interest applicable on the loan is largely determined based on the borrower’s credit rating. Interest on personal loans may be fixed or variable. Hence, if you hold a healthy credit score, then it is easy for you to get a personal loan. However, a bad credit history can greatly dim your chances of getting a personal loan.

Repayment Term

Personal loans usually have a fixed repayment term which is specified in months like 12 months, 24 months, 36 months and so on. If you have taken a personal loan with a longer term, then you monthly repayment amount will automatically be lower. However, you will be paying a higher amount as interest towards the loan over the longer term. On the other hand, a shorter term personal loan will up your monthly repayment amount but will attract significantly lesser amount towards interest on the loan as you will be repaying the loan in lesser time. Hence, to sum up, following are the pros and cons of a personal loan. 

Pros

·   No restrictions on end-use of funds.

·   Flexible repayment schedule – short term or long term.

Cons

·   Interest rates tend to be considerably higher.

·   Stricter eligibility requirements.

·   Poor credit scores can eliminate your chances of getting a personal loan.

Car Loans (Secured)

Car loans, as the name suggests, are used for the purchase of a new or used car. Car loans are secured loans where the vehicle which is purchased serves as the security or collateral against the loan. In case the borrower fails to make the repayment on the car loan, the lender may seize the purchased vehicle to recover the loss. Like any other type of loan, car loans are also repaid in fixed installments over a period of time which is specified at the time of taking the loan. Also, like other loans, the lender will assume ownership of the purchased vehicle until the entire loan amount has been paid off.

Interest Rates

Since a car loan is a secured loan where the vehicle purchased serves as security, car loans are significantly low-risk loans for lenders. For this reason, interest rates on car loans will be significantly lower as compared to personal loans. Also, interest on car loans are mostly fixed and not easily subject to change.

Repayment Terms

Car loans are usually provided for longer terms of 36, 48 or 60 months. Unlike personal loans, where credit history is the primary determinant for loan approval,  car loan does not put as much weight age on the borrower’s credit history.  A borrower with a less than ideal credit record can also get a car loan. Also, unlike personal loans, the amount of loan and interest rate applicable on a car loan is dependent on the price of the vehicle (new cars or the condition of the car (for used vehicles). Before you settle for a particular loan, do some research on other available options for car loans. To sum up, here are the pros and cons of car loans.  

Pros

·   Usually offered at lower interest rates.

·   Credit history not a stringent determinant for obtaining the loan.

·   May be advantageous as an ‘on the spot’ financing solution.

Cons

·   Ownership of the car remains with the lender until complete loan has been repaid.

·   Borrowers usually required to make a down payment or up-front deposit to secure the loan.

Whether it is a personal loan or a car loan, the rates and terms of the loan will vary from one lender to the other. Hence, before you settle on a particular loan, it’s always advisable to research for other available options offered by other banks. Explore all options like banks (public. Private, big and local), non-banking finance companies, credit unions and any other lending platforms. Finally settle for a provider which offers you a loan which is the closest fit to your financial requirements.