Buying a New Car- How to Decide Between a Personal Loan vs Auto Loan?

Buying a New Car- How to Decide Between a Personal Loan vs Auto Loan? | 2021

This article will discuss “How to Decide Between a Personal Loan vs Auto Loan” when you decide to buy a new car. When you choose to buy a new vehicle, many factors like Type of Vehicle, budget, colour, make, model, etc.

 Financing is another critical criterion while buying a new car. But for some reason, you decide to buy a car with a Personal Loan offer; then you must read this blog post.

Though A personal loan can be used to buy a new car, is it worthwhile? Nope, financing your new car purchase through a personal loan can be a terrible idea because of 2 reasons; the first one is Auto loans are secured loans and easier to get, and secondly, Auto loans are way cheaper than personal loans.

What is a Personal Loan?

Personal Loan vs Auto Loan

A personal loan is an unsecured loan taken to meet emergency financing situations, health expenses, wedding expenses, travelling, buying a gadget, lending to a friend, and countless other requirements.

A personal loan is available to anyone with a steady income source, whether salaried or self-employed. 

The average rate of Interest is 12-20% depending upon the bank and the borrower. A higher credit score will get you a better rate of Interest than a bad one.

The repayment tenure is a maximum of 5 years, and the maximum loan amount is Rs.50 lacs. Apart from the interest rate, banks also charge you a document processing fee of1-2.5% of the loan amount.

What is an Auto Loan?

Personal Loan vs Auto Loan

An auto loan is a secured loan used to buy a new or used car. It is offered by most PSU Banks, Private Banks, and other NBFCs.

The average interest rate varies from 6.5-9%, which is very low compared to personal loans. Banks offer to finance up to 80-90% of the car’s value, but some banks also offer up to 100% financing on the on-road price.

The maximum auto loan amount is Rs. 1 Crore, and they have a longer repayment tenure of 8 years.

Since it is secured, you will get an auto loan even if you don’t have a perfect credit score. The policy for approval is less stringent.

Auto loans also attract a one-time processing fee of 0.5-2%.

Now we know the difference between a Personal Loan and an Auto Loan.

So, let’s analyze the situation where it will be foolish to buy a new car with a personal loan some scenarios where it will be wise to buy a car with a personal loan.

You may also like to read: What is Personal Loan | Everything You Need To Know

Scenarios When Buying a Car with an Auto Loan is Better

Here are the usual scenarios where buying a car with an Auto loan is a wise choice.

Cheaper Rate of Interest:

Personal Loan vs Auto Loan

The interest rate for buying a new or used car is meagre compared to a personal loan. If you look at different banks and NBFCs, then the average rate of Interest for auto loans falls between 6.75-9%. But the average rate of Interest for personal loans will vary from 11% to 20%, depending on the banks and the borrower.

So if you are looking for a cheaper rate of Interest and lower repayment amounts, then an auto loan is a better option.

Low Credit Score:

Personal Loan vs Auto Loan

When you have a low credit score, you may be denied a personal loan from most banks. However, since an auto loan is a secured loan, you will be approved. The car acts as collateral and is hypothecated to the bank until all repayment is made.

Personal loans have stringent eligibility criteria, and you must have a good credit score(700 or more) to get yourself a personal loan.

Car of Your Choice:

Most banks now finance buying luxury cars up to Rs.1 Crore, which will not be possible with a personal loan. Most banks offer personal loans up to Rs.50 lacs only. So if you have a bigger budget for buying a new car, go for an auto loan.

Longer Repayment Period:

Personal loans have a shorter repayment tenure than auto loans. The maximum repayment tenure for a personal loan is five years, while it is eight years for auto loans. The longer the term, the smaller is the EMI. A smaller EMI puts less pressure on your dispensable income.

Buying from a Car Dealer:

Car dealers offer car financing options through their in-house Auto Loans. Often these rates are significantly cheaper than bank Auto loans. So if you were buying from a car dealer and offered a lower rate of interest auto loan, you should grab it.

Scenarios When Buying a Car with a Personal Loan is Better

There are situations where you might think that buying a car with a personal loan is better than an auto loan. So let’s look at these circumstances,

Purchasing a Used Car:

Personal Loan vs Auto Loan

The rate of Interest for buying a new car and a used car is different. If you look at the PSU banks, the average interest rate for purchasing a used or pre-owned car is 9-15% and 12-16.5% for Private banks.

In some cases, these rates are higher than personal loan offers. If it is the case, then you can buy the car with a personal loan. However, individuals with good credit scores get personal loan offers at a meagre rate of Interest.

Buying a Car from an Individual:

Personal Loan vs Auto Loan

When you buy a car from a 3rd party individual, a bank may not finance the purchase. But you can take a personal loan and purchase it from the individual. 

Banks require registered entities to buy and sell cars because they approved auto loans based on their quotation and approved loans in their names only. This is done to prevent cheaper loans from being utilized for other purposes.

No money to Pay for Down Payment:

While an auto loan is sanctioned, a smaller portion, maybe 10-20%, is to be paid by the borrower in the form of Down-payment. But what if you don’t have any extra cash to pay for the down payment? In this case, a personal loan can come in handy.

Imagine a situation where the cost of the new car is Rs. 10 lacs, and the bank has agreed to pay 85% of the amount. But still, you have to pay 15% or Rs.1,50,000 as a down payment. This is a big chunk of money, and settling in a single shot can be a problem.

So if you are in this situation, then a personal loan can be a solution.

Buying an Older Vehicle:

Personal Loan vs Auto Loan

Sometimes people buy vintage or classic cars, but these vehicles do not pass the requirement of banks for an auto loan. They are generally older than 15 years and do not pass the essential requirement of RTO(Regional Transport Office).

In this case, a personal loan can be an excellent option to buy a vintage or classic car. 

So, here were four circumstances where buying a car from a personal loan is better than an auto loan.

You may also like to read: Stocks Vs Bonds | Differences to Consider When Investing 


Buying a New Car How to Decide Between a Personal Loan vs Auto Loan 7

While both loans may be able to help you buy your dream car, deciding between a personal loan and an auto loan can be difficult. Therefore, before choosing one over the other, you need to consider the above circumstances carefully. 

If you have any additional questions about these two types of loans, feel free to post them in the comments below!


Anish is post graduate in commerce & management. He is a qualified Chartered Accountant & Information System Auditor with experience of more than 20 years in the field of management, accounting & taxation. He is visiting the faculty of various universities and providing career advice to aspirants Anish Agrawal has authored many books on Accountancy & Taxation.

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