Personal Loan vs Car Loan: Understanding the Key Differences

When it comes to financing large purchases, personal loans, and car loans are popular choices. Both serve different purposes and have their own set of advantages and disadvantages. In this article, we’ll go over the fundamentals of Personal Loan vs Car Loan, highlighting the differences so you can make an informed decision.

Difference between Personal Loan vs Car Loan

What is a personal loan?

A personal loan is a loan that can be used to cover any type of expense. A personal loan can help you pay for your dream wedding, fund your higher education, or consolidate your debts. You can use a personal loan to purchase a car as well.

Personal loans are unsecured loans. This means you don’t have to provide the lender with collateral to secure the loan amount. A personal loan is offered based on your financial situation. Personal loan approval takes into account factors such as income and debt-to-income ratio. In addition to these factors, your credit score plays an important role in determining your eligibility for a personal loan. A good credit score will help you get much better loan terms. In general, personal loans have higher interest rates than car loans. The primary reason for this is that personal loans are 100% collateral-free, posing a higher risk for the lender.

What is a car loan?

A car loan, as the name implies, is a loan used solely for the purchase of a vehicle. You cannot use the loan amount to cover other expenses, as you could with a personal loan. Second, a car loan is considered a secured loan. The car you buy serves as collateral for the lender. If you do not make your payments on time, the lender has the authority to seize the car.

One of the most crucial things to remember about auto loans is that they only cover about 80% of the cost of the vehicle. You are required to cover the remaining 20% of the cost as a down payment. Car loans have lower interest rates than personal loans because they are secured loans.

Difference between Personal Loan and Car Loan

  • Loan amount: Personal Loans offer borrowers who need extra money for car payments, insurance, taxes, and upgrades a lot of advantages due to their flexible loan amounts. It’s a comprehensive financial solution. Car loans are more stringent because they only consider the vehicle’s cost, preventing borrowers from going over budget for the purchase.
  • Interest rate: Axis Bank Personal Loan interest rates are based on several variables, such as credit score, income level, and outstanding debts, and they begin at 10.75% p.a. Car loans provide more stable and predictable loan costs over time because they are secured by the vehicle, which often results in lower, fixed interest rates that are less affected by individual credit factors.
  • Repayment tenure: Borrowers can choose a Personal Loan tenure that fits their monthly budget and repayment schedule, with options ranging from 12 to 84 months. To lower EMIs, they can choose for a longer tenure. Longer tenure options, like seven years, for Axis Bank Auto Loans can help spread out the cost of higher-end cars, making them more affordable for a wider range of buyers.

Should I take a Personal Loan to buy a car?

  • Loan amount and rate of interest: A personal loan can fill the gap if the car you’ve had your eye on is slightly beyond your means. It offers amounts large enough to pay for the car’s entire cost as well as additional costs. The catch, though, is in the interest rates; personal loans have higher rates than auto loans because they are unsecured.
  • Purpose of availing of the loan: You have the freedom to use the money from a personal loan for more than just buying a car. This may entail paying for adjustments, insurance, or even non-automotive costs. If you plan to use the loan for something other than purchasing a car, a personal loan’s flexibility can be very helpful.
  • Tenure of the loan: The length of a personal loan can have a significant impact on your budget. You can pick a repayment schedule that works for you with options typically up to seven years (and sometimes longer). Longer tenure does, however, result in higher total interest payments. When making a decision, take into account your long-term financial situation and how it fits with the loan’s repayment schedule.
  • Ownership of the vehicle: Choosing a Personal Loan does not result in any collateral being placed on the vehicle, so you can take possession of it right away. Many find this freedom appealing, particularly if they want to customize the car or are worried about the ramifications of taking out a secured loan, like the possibility of being repossessed. You can also sell the car at any time with immediate ownership, providing you with financial flexibility that a car loan might not be able to provide.

Is Getting a Personal Loan a Good Option for Buying a Car?

  • Purpose of availing of the loan: It should be noted that the money borrowed from an automobile loan cannot be used to buy anything else. The car can be purchased with a personal loan that can be used for any expenses you choose. It is preferable to choose a personal loan if you have additional costs to pay for than the cost of your car.
  • Ownership of the vehicle: The primary distinction between a personal loan and an auto loan for those who choose to purchase a car is who owns the vehicle. Since auto loans are secured loans, ownership of the vehicle won’t pass to you until the loan term has ended. Selecting a personal loan will give you instant ownership of the vehicle after you make the purchase. This combined with the fact that personal loans don’t require a down payment make them a worthwhile alternative.
  • Tenure of the loan: There are significant differences in the terms of both loan types. A personal loan can have a duration of one year to five years, whereas a car loan can have a duration of three years to eight years. You will pay less interest for the availed loan if the loan has a shorter tenure. However, the short tenure means that there will be a much larger amount due in EMI. Everyone wants to pay back their loan as quickly as possible. You can apply for a personal loan with a shorter term if you can make large EMI payments. Conversely, auto loans have a longer term and a lower interest rate. With a longer tenure, the only thing to think about is the total amount of interest you will have to pay.

Pros of Personal Loan

  • Flexibility in use: This can be applied to many different personal needs, not just financing for cars.
  • No collateral required: The loan does not need to be secured by an asset for the borrower.
  • Fixed repayment terms: offers fixed monthly payments along with clear budgeting.

Pros of Car Loan

  • Lower interest rates: offers reduced rates because the loan is backed by the car.
  • Longer tenure options: possibly smaller monthly installments dispersed over a longer duration.
  • May improve credit: Your credit score can rise if you make your payments on time.


Personal Loan vs Car Loan have different uses and advantages. Although they don’t require collateral and offer flexible use, personal loans have higher interest rates. Conversely, auto loans provide longer tenure options, cheaper interest rates, and the possibility of credit improvement. Make an informed decision based on your priorities and financial needs.

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