When you want to buy a used car or a secondhand car, you have two primary financing options. First, a used car loan and second, a personal loan. Each has its own pros and cons and the best option for you would be based on your needs. You can make this decision for yourself after understanding how each loan works and what the differences between the two are.
Type of loan
A personal loan is an unsecured loan, which means that no collateral is required. A car loan, on the other hand, is a secured loan. Here, the car itself serves as a collateral. This means that in case you are unable to pay your loan Equated Monthly Instalments (EMIs), your car can be taken away. In the case of a personal loan, since your car is not a 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 a collateral present, the interest rate tends to be lower. Currently, the interest rate for a car loan can range anywhere between 7% to 15% while the interest rate for personal loans is in the range of 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 is when it comes to 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, however, 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. A used car loan, on the other hand, tends to have a slightly longer term if you should so choose, of up to seven years. While a longer loan tenure does reduce the EMI amount and make it easier to meet your EMI obligation monthly, it can increase your overall interest outgo 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 on the car you wish to own and want quick funds but don’t have a promising 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 also use a personal loan EMI calculator to figure out what your monthly obligation will be 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.