Personal Loan Or Car Loan - Know The Difference

Planning to buy a new car with the help of loan. Read to know about the advantages and disadvantages of both car loan & personal loan and choose wisely.

10 Nov,2022 12:16 IST 4 views
Personal Loan Or Car Loan - Know The Difference

Choosing between a personal loan and a car loan can often be difficult for someone who is buying a new car or even a second-hand automobile. The person’s specific requirements would mostly determine which option is better.

Despite the fact that car loans are specifically made to finance the purchase of a new or used vehicle, some considerations, like those that apply to other secured loans, may influence the borrowers’ choices.

Understanding Personal Loan

A personal loan is an unsecured debt product, hence no collateral is needed to obtain one. A personal loan can be utilised for any legitimate purpose. It can be a good alternative to meet short-term monetary requirements for financing a vacation, repaying other high-cost debt, meeting healthcare expenses, arranging a wedding, and even for buying costlier products such as cars and bikes.

Understanding Car Loan

A secured loan used to purchase a four-wheeler is called a vehicle loan. Car loans are secured, which means they are supported by a lien on the vehicle that serves as its collateral. When a borrower is in default on payments, a lien gives the lender the right to reclaim the vehicle. The lien is lifted after the debt is entirely repaid.

Typically, a car loan covers 80% of the vehicle’s on-road cost. The borrower is responsible for paying the final 20%. An auto loan can only be used to purchase cars, as opposed to personal loans that can be used for anything.

Differences Between Personal Loans and Car Loans

There are a few differences between personal loans and car loans that borrowers should understand before deciding which debt product to avail.


A personal loan doesn’t require the borrower to submit any asset as collateral with the lender. In the case of a car loan, the vehicle itself acts as the security.

Interest Rate:

The interest rate on a car loan is generally lower than on a personal loan. This is because a car loan is backed by a collateral.


A personal loan is usually for a shorter tenor, ranging from a few months to as many as five years. A car loan is usually availed for at least two-three years, going up to seven-eight years.


The amount in the case of a car loan will depend on the cost of the car. In the case of personal loans, the amount depends on the borrower’s income and credit score.


In the case of a personal loan, ownership of the vehicle rests with the buyer. But car loans are secured debts, so the vehicle’s ownership lies with the lender until the borrower fully repays the loans.

Credit Score:

A borrower’s personal loan application may be rejected if the credit score is too low. But such a person can still get a car loan because the vehicle acts as the collateral.


The borrower should weigh the advantages and disadvantages of both the loan products before deciding which option to take for financing a car.

In general, a car loan carries a lower interest rate than a personal loan. However, borrowers can get a personal loan at competitive rates if they have a good credit score. On the other hand, personal loans are easier to avail and offer greater flexibility when it comes to using the money borrowed and paying it back.

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