Do you know the difference between a car loan and a personal loan? Well, the most basic difference is the loan type. A car loan is a secured loan whereas a personal loan is solely unsecured and is provided on the basis of credit history and income criteria.
A personal loan is an unsecured loan given to a person by a bank or a non-banking financial institution to meet their financial needs. The amount of a personal loan will be determined by a number of factors, including the applicant’s income, employment history, and credit history.
Automobile loans, on the other hand, are loans taken out particularly to help with the cost of a car. Many car loan options allow you to finance up to 80% of the total cost of the vehicle. You will be responsible for the remaining 20% of the vehicle’s cost.
The difference in interest rates between the two types of loans is critical to note. A personal loan’s interest rate is typically substantially greater than that of a car loan due to the higher risk involved. It’s also because personal loans don’t necessitate any form of security.
Points to Note While Comparing the Two
The loan Objectives are different
It is important to note that a car loan cannot be used to buy anything other than a car with the borrowed funds. A personal loan can be used to purchase the car as well as for any other needs. If you have other costs to deal with in addition to the auto payment, a personal loan is a better option.
Your credit rating requirements are different
For personal loans, a credit score of 700 is usually required, with a score of 700 or better being preferred. If your credit score is less than 600 or you don’t have enough credit history, you may not be qualified for a personal loan, but this isn’t the only criteria lenders consider.
Auto loans have lenient credit requirements since the lender is protected by the fact that it can seize your vehicle if you default.
Rates of Interest
Unsecured loans, on the whole, have higher interest rates than secured loans with collateral. Unsecured personal loans have stricter approval criteria, so you’ll need to have outstanding credit to qualify. A personal loan may not be an option if yours is in bad repair.
Repayment Period
While the average personal loan is repaid in three years, some lenders offer five-year terms. Car loans, on the other hand, can have payback lengths of up to seven years, and in some cases even longer. While you should not extend a loan as much as feasible, some borrowers require additional time to repay an auto loan. A vehicle loan is the ideal option if you need a longer loan period.
A deposit in the form of down payment is required
Some car lenders, particularly those with poor credit, can require a down payment. In any case, putting down some cash can usually result in a lower interest rate. A larger down payment equals a shorter loan term and more money saved on interest rates in the long run. Personal loans do not demand a down payment.
The Bottom Line
Many people prefer a dealer-financed auto loan when purchasing a new car since it is quick and simple. However, in other circumstances, obtaining a personal loan may be more beneficial. Analyze whether you require collateral to secure the loan in order to make an informed decision. The car loan or personal loan interest rate you can pay and your credit score status should also be considered.
Read More: The Importance of Eligibility Criteria in Gold Loan
