Car loan vs personal loan: Which is the best option for buying a new car in December?

Representative image | Photo credit: BCCL

New Delhi: Car manufacturers usually offer interesting offers in the month of December. In addition, interest rates on bank loans have fallen and dealers want to liquidate end-of-year inventories by also giving attractive discounts. So, is it a good time to buy a new car or another big car for the family?

Today, there are many ways to finance a new car. You can visit your favorite automaker’s local showroom to learn more about not only the features of your new car, but also your financing options. The loan contracted to buy a new vehicle is a car loan.

Typically, auto loans have terms of three to five years, but some banks may also offer loans for up to seven years. A longer term loan can mean smaller equivalent monthly payments (EMI), which makes the vehicle more affordable, but overall you pay more interest. It’s important to keep in mind that a car is a depreciating asset, so taking out a loan for a longer period may not be the best thing to do.

Some private sector banks, for example, will lend for the full ex-store price of the car, while others may lend up to 80%. A car loan can only be taken out for the purpose of buying a car. However, a person can easily buy a new car using a personal loan.

A car loan is a secured loan and it is provided against collateral, which is the vehicle itself. When you take out a loan from a bank to buy a car, the car is mortgaged to the bank. In other words, the car that is mortgaged to the bank will remain in the possession and use of the borrower. Unfortunately, if you are unable to repay your loan, the bank may repossess the car to recover its due.

A personal loan, on the other hand, is an unsecured loan provided without any collateral. Moreover, the lender does not ask the reason for taking such a loan. You can take out a personal loan for a dream holiday abroad, to renovate your house or even buy your dream car. More importantly, since this is an unsecured loan, your car is not mortgaged to the bank and therefore cannot be repossessed by the bank. However, your credit score takes a hit and failure to repay the loan will result in severe legal action.

Banks or car finance companies have interest rates ranging from 9% to 15% per year. However, a personal loan from the same bank can charge from 10.35% to 21.5% per year. Also, a car loan from a car finance company must be paid off in no more than five years.

Let’s check the impact on your pocket of the different rates.

Consider that you have taken a loan of Rs 5 lakh for five years. On a 10% interest car loan, your equivalent monthly payment (EMI) will be Rs 10,624 and your total interest will be Rs 1.37 lakh.

A personal loan, for example, of Rs 5 lakh taken out for five years at an interest rate of 16% will mean an EMI of Rs 12,159. The total interest cost will be around Rs 2.29 lakh over the term. of the loan.

In a nutshell, before taking out a loan, a person should always compare the interest rates charged by different lenders.

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