Personal Loan Vs Car Loan - Which Is Better?

15 Jun 2022

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Owing a car is a dream for many. A vehicle offers you the convivence of travelling when you want to and saves you from the rush of local commute. Having your own car also helps in times of emergency. With the outbreak of novel coronavirus, using local commute or public transportation can be daunting. Your own vehicle ensures your safety in such trying times.

Now, it is expensive to buy a car. Even low-cost vehicles run into several lakhs of rupees. Instead of saving up for years, you can take a loan to buy a car immediately. A loan helps you buy your dream car without too much of a financial burden. Car loans are loans that have been specially designed to help you purchase a four-wheeler. Many people also opt for a personal loan to finance their car purchase.

Now, you may wonder which loan is better. Should you take a car loan or a personal loan to buy a car? With each of these two types of loans having their own unique benefits, the debate of a personal loan vs car loan can go on and on. This article will take you through the major differences between personal loans and car loans that you must know about in order to pick the right option. Read on to know more about personal loans, car loans, the difference between the two and which loan will be apt for you.

What is a personal loan?

A personal loan is a type of loan that can be availed of to meet any kind of expenses. Whether it is paying for your dream wedding, funding higher education or even doing debt consolidation, a personal loan always comes in handy. You can use a personal loan to buy a car as well.

A personal loan is an unsecured loan. This means that you do not need to provide the lender with collateral to secure the loan amount. A personal loan is offered based on your financial eligibility. Factors like your income and debt to income ratio are considered for personal loan approval. Along with these factors, your credit score also has an integral part to play in determining your eligibility for a personal loan. A good credit score will help you land much better terms on your loan.

Generally, a personal loan is offered at a higher interest rate than car loans. The primary reason behind this is that personal loans are 100% collateral-free and therefore, involve a higher risk for the lender.

What is a car loan?

As the name suggests, a car loan is a loan that is given for car purchases only. You cannot use the loan amount to finance other expenses the way you can with a personal loan. Secondly, a car loan is a secured loan. The car that you purchase serves as collateral for the lender. The lender has the authority to seize the car in case you fail to make your payments.

Some important tips to consider about car loans is that these loans only offer up to around 80% of the car price. The other 20% of the price has to be taken care of by you in the form of a down payment. Since car loans are secured loans, they can be availed of at a lower interest rate than personal loans.

Personal loan vs car loan

To help you understand the main differences between a personal loan and car loan, here is a table that illustrates the key features of the two types of loans.

Point of difference Personal loan Car loan
Loan amount The loan amount that can be availed of depends upon your eligibility and the maximum amount offered by the lender.   If you have a strong financial standing and a higher credit score, you are eligible to get a loan of a higher amount. The loan amount that you secure is based upon the value of the car to be purchased.   You can generally get around 80% of the total car cost.  Some lenders may finance up to 90% of the car cost.
Interest rate Personal loans, being unsecured loans, tend have a higher interest rate. This is to compensate for the risk involved for the lender in the absence of collateral. Car loans are offered at a comparatively lower interest rate. The bank uses your car as collateral to secure the loan amount.
Tenure of repayment Personal loans are usually offered for a shorter tenure owing to the absence of collateral. This tenure lies anywhere between 1 to 5 years. Usually, car loans can be availed for 3 to 8 years of tenure.

Should I take a personal loan to buy a car?

The answer to this question depends on many factors. Taking a personal loan for car purchase might suit some whereas a car loan may suit others. Let’s look at how you can choose between the two.

To start off, a major point that makes many people opt for a personal loan to buy a car is that this form of a loan offers 100% funding. With a car loan, you can only avail of 80% of the amount. Paying the remaining lump sum amount of 20% in one go can be a challenge, especially for cars of higher value. So, a personal loan might make sense for someone who cannot afford the down payment on their vehicle.

Another factor that you must consider before making a choice is the car loan vs personal loan interest rate. As mentioned before, personal loans are usually offered at a higher interest rate for a shorter tenure. If you want to try for a lower interest rate, then you may want to choose a car loan.

Ownership of the car must also be considered before deciding which loan is better for you. In the case of a personal loan, you can get immediate ownership of the vehicle under your name. However, with a car loan, the ownership will be first transferred to the lender's name. You will get the ownership rights only when the entire loan amount is repaid.

Lastly, you need to look at which loan type is more easily accessible for you. Since personal loans are unsecured loans, they have a solid set of eligibility norms that you are required to meet. You need to have a strong financial portfolio and a suitable credit score and history. Your loan application undergoes scrutiny before it is approved. If you have a lower credit score, you may want to consider opting for a car loan instead.


As we can see, the choice between a personal loan and a car loan depends entirely upon your unique financial needs and circumstances. Bank of Baroda offers car loans and personal loans with simple application procedures and affordable interest rates. Now, you can go ahead and live life with ease thanks to our easy loans. Get in touch with us today to know more.

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