You have two primary financing options when you want to buy a used or a secondhand car. First, a used car loan, and second, a personal loan. Each has its pros and cons, and your best option is based on your needs. You can make this decision after understanding how each loan works and the differences between the two.
Type of loan
A personal loan is an unsecured loan, meaning no collateral is required. A car loan, on the other hand, is a secured loan. Here, the car itself serves as collateral. Your car can be taken away if you cannot pay your loan Equated Monthly Instalments (EMIs). In the case of a personal loan, since your car is not collateral for the loan, it will not be taken away if you default. There can, however, be other consequences, such as legal proceedings after a certain number of defaults.
The main thing you need to know about the difference between secured and unsecured loans is that the type of loan determines the interest rate. Since the risk is lower for the lender in the case of a secured loan like a car loan, as there is collateral, the interest rate tends to be lower. Currently, the interest rate for a car loan can range from 7% to 15%, while the interest rate for personal loans ranges from 10% to 24%, depending on the lender.
Your credit score plays a huge role in determining your creditworthiness, which lets the lender know whether you are a high-risk borrower or not. The higher your credit score, the better your loan eligibility for a personal loan. For used car loans, however, it’s easier to get the loan irrespective of your credit history. Here, the amount of loan sanctioned will be up to 70% to 80% of the car’s value.
The maximum loan tenure of a personal loan tends to be five years. On the other hand, a used car loan tends to have a slightly longer term, if you should so choose, of up to seven years. While a longer loan tenure reduces the EMI amount and makes it easier to meet your EMI obligation monthly, it can increase your overall interest over the long term. Hence, if you don’t require a longer loan tenure, you should not opt for it just because it is available.
Which works better?
If you have narrowed down the car you wish to own and want quick funds but don’t have a good credit score, you could still consider a personal loan. This is because of the advantages it offers. You can easily apply for a personal loan online and use a personal loan EMI calculator to figure out your monthly obligation towards this loan.
Even if you have a high credit score, you should still consider a personal loan for buying your car because the process of application and disbursal is seamless if you choose the right lender.