Friday, May 24, 2024
HomeLoanPersonal Loan vs Car Loan: Know the Difference

Personal Loan vs Car Loan: Know the Difference

A car loan is often the preferred choice for purchasing a car among the two common financing options, which has a personal loan on the other hand. This raises a severe fight of personal loans vs car loans, and who is the best to get a loan? A significant distinction between personal loans and car loans lies in collateral requirements, with personal loans being unsecured while auto loans are backed by the car, resulting in lower risk for the lender and typically lower interest rates for auto loans.

Additionally, personal loans offer flexibility for various purposes, including car purchases, while car loans are exclusively for buying vehicles. Personal loans or car loans both hold a strong position in their field of service. Let’s delve deeper into each question to gain a comprehensive understanding of the topic.

What is a Personal loan?

A personal loan is an amount you borrow for your expenses. In recent times, an increasing number of people are choosing personal loans as a viable option to finance significant purchases. Banks and non-banking financial companies provide unsecured personal loans based on factors like income, employment, and credit history of the applicant.

What is Car Loan?

Car loans, specifically designed for car payments, often cover up to 80% of the total cost, with the remaining 20% to be borne by the borrower. Unlike other loans, personal loans do not require collateral, and default does not lead to asset auction.

Difference Between a Personal Loan andCar Loan

Before jumping to the conclusion that which is a better personal loan or a car loan you need to understand the difference between to two in detail. After understanding you have to choose which one suits you the best as per your need.

1. Personal Loans Pros and Cons

A personal loan, obtained from a bank or lending institution, provides a lump sum of funds that can be used for various purposes, and if secured, the lender can seize your asset for non-payment.


  • Funds from a personal loan can be freely spent
  • There is flexibility in choosing the payment structure.


Higher interest rates are expected compared to car loans.                                            

  • Stricter lending requirements are in place.
  • Consumers with low credit scores are unlikely to qualify.
  • Car loan vs personal loan: How interest rate works in personal loan

Term of Personal Loan:

Personal loans come with predetermined repayment periods, like 12 or 36 months, where longer terms reduce monthly payments but accumulate more interest.

2. Car Loan Pros and Cons

A car loan is secured by the purchased vehicle, allowing the lender to repossess it in case of default. Car loans involve making fixed monthly payments over a set term, often lasting five years.


  • Typically lower interest rates compared to personal loans.
  • The easier approval process with average credit history.
  • Often available at dealerships.
  • Fixed payments provide predictability.


  • The title to the car is not obtained until final repayment.
  • A deposit may be necessary for loan security.
  • Car loans are limited to vehicle purchases.

Car Loan Tenure:

Car loans typically have fixed terms of 36, 48, 60, or 72 months, where shorter terms result in higher monthly payments. Before committing to a dealer loan, explore car loan options from banks or credit unions to find better deals.

The significant difference in interest rates between personal loans and car loans arises from the absence of collateral, increasing the risk for lenders. In situations where funds for the remaining car cost are lacking, choosing a personal loan allows obtaining the entire amount at once, but is it truly the most prudent choice for a car purchase?

Which is the Best Personal Loan or Car Loan?

Consider these factors before selecting between a personal loan or a car loan for financing your car purchase.

1. Loan Amounts and Interest Rates Offered

Consider loan amount, interest rates, and credit rating when choosing between personal and car loans, with personal loans preferred for good credit ratings and car loans for collateral-backed security.

2. Consider the Loan Purpose

Car loans are exclusively for purchasing a vehicle, while personal loans offer flexibility for various expenses.

3. Consider the Loan Tenure

Personal loans range from 1 to 5 years, while car loans range from 3 to 8 years, each with its advantages and disadvantages.

4. Consider Ownership

With car loans, ownership transfers after the loan tenure, while personal loans offer immediate ownership upon car purchase.

5. Consider Loan Approval Procedure

Personal loans are harder to get without collateral, while car loans are easily available regardless of credit score due to collateral.

When deciding between a personal loan or a car loan for car financing, consider factors like loan tenure, principal amount, EMI payment, and desired interest payment, comparing options from various lenders.

Read More: Personal Financial Planning Process Steps


Choosing between a personal car loan and just a car loan requires a thoughtful evaluation of various factors. Personal loans offer flexibility in loan purpose, immediate ownership of the car, and the potential for shorter loan tenure. However, personal car loans often come with higher interest rates and more stringent approval requirements.

On the other hand, car loans have lower interest rates and longer loan tenures and are easily obtainable even with a lower credit score. However, they require the vehicle to serve as collateral, and ownership transfer may only happen upon completion of the loan term.

Ultimately, it is recommended to explore multiple loan options from different lenders, compare interest rates, terms, and conditions, and seek professional financial advice to determine the most suitable choice for your specific circumstances and financial goals the decide personal loan or car loan that suits you best.

Personal Loan vs Car Loan – FAQs

Personal loan vs car loan which typically provides the best interest rates?

Ans. Generally, car loans tend to have lower interest rates compared to personal loans.

Can I use a personal loan as a personal car loan?

Ans. Yes, personal loans can be used for various purposes, including using them as a personal car loans.

Do I need collateral to secure a personal loan?

Ans. Personal loans are typically unsecured, meaning they do not require collateral. It’s worth noting that certain lenders may provide the option of secured personal loans.

What happens if I default on a car loan?

Ans. If you default on a car loan, the lender has the right to repossess the vehicle to recoup their losses.

Car loan vs personal loan which is most easy to get?

 Ans. Yes, car loans are generally more accessible even with a lower credit score due to the presence of collateral. Personal loans may be more challenging to obtain with poor credit.



Please enter your comment!
Please enter your name here

Recent Posts

Most Popular