Car Finance vs. Personal Loans: Which is Better for Buying a Car?

You’ve found your dream car, performed research, and now comes the most important decision: how to finance it. There are options like car financing and personal loans that you can choose from, but it is also easy to get confused. However, picking the right financing is more than interest rates. In fact, it’s about your financial health, repayment comfort, and long-term feasibility. Let’s break both down, so you can make a sound choice.

What is car finance?

Car finance basically covers multiple financing options for purchasing a vehicle. Here is a detailed explanation of each:

• Secured car loan
  When you take a loan to buy a car, the lender keeps it as collateral. So, it remains under the lender’s claim until you fully repay the loan.
  
• Leasing
  You pay a particular amount monthly to use the car but do not own it entirely. At the end of the lease, you can either return the car or pay a residual price to purchase it.
• Hire Purchase
  You pay monthly for the car, and after the last instalment is completed, you will be given ownership of the vehicle.     

What is a personal loan?

A personal loan is a type of unsecured loan that you can use for any purpose, in this case, buying a car. Unlike car financing, it is not linked to the vehicle, so you have complete ownership. A personal loan does not require a collateral which makes the interest rates higher. Furthermore, the loan approval is based on your credit score and financial profile.

Personal loans can even cover insurance, registration costs, or customisations. But the increased interest rates and shorter payback terms can make them more expensive in the long run. For those in Australia considering this option, Natloans offers a service to help navigate the different personal loan options available for a car purchase. 

Key differences between car finance and personal loans

1. Car financing is designed exclusively to purchase a vehicle. While, a personal loan can be used for any reason, including car-related costs. 
2. With car financing, the lender keeps an interest in the vehicle until the debt is paid off. A personal loan allows you to buy the vehicle entirely from the very start. 
3. Car financing often offers lower interest rates since the vehicle is kept as security. Conversely, personal loans have higher rates due to their unsecured nature.
4. Car finance is easier to get. This is because the car acts as security for the lender. Personal loans, on the other hand, don’t have any collateral. Therefore, they can be slightly difficult to qualify for unless you have a good credit score.
5. A personal loan allows you to use the funds for insurance coverage, registration, or modifications. Conversely, car financing is limited to the vehicle purchase itself.   
6. Car financing options often have longer payback durations (up to 7 years). However, personal loans are normally restricted to 4-6 years.

When should you choose car finance over a personal loan?

Car finance is a better option if:

• You want lower interest rates and consistent EMIs.
• You are willing to hold the car as collateral until final repayment.
• You are comfortable with a down payment and a structured payback schedule.
• You plan on keeping the vehicle for a long term rather than upgrading often.

When should you choose a personal loan instead?

Here is when a personal loan is a better option:

• You do not want to put up your car as collateral.
• You need greater resources for insurance, accessories, or registration.
• You want complete ownership of the vehicle from the start.
• A high credit score qualifies you for a low personal loan interest rate.

Which option saves you more money?

Let’s assume you need ₹8 lakh to buy a car. Here is how both options compare:   

• Car Finance
  For a 5-year car finance loan with a 10% interest rate, the EMI is about 16,998, with a total repayment of ₹10,19,858.
  
• Personal Loan
  With a higher interest rate of 14-18%, your EMI might be between ₹18,614 and ₹ 20,314 for the same period, resulting in a total payback of ₹3,16,876 to ₹4,18,885.

Before deciding, you can also take the help of a car loan EMI calculator. It will give you an idea of how much you need to repay each month as EMIs, so you will be able to plan your finances better.

Car financing is more cost-effective as the interest rates are low. If you prefer greater financial independence, then opt for a personal loan. Both options have their benefits. The best choice depends on your financial standing and long-term goals. Taking a car loan is helpful if you want reduced interest rates and fixed payback. A personal loan offers flexibility and ownership independence.