Buying a car is a significant milestone—and often a major financial decision. While some buyers can afford to pay the full price upfront, many rely on loans to finance their vehicle purchase. But here comes the dilemma: Should you take a car loan or a personal loan to buy a car?
Both have their pros and cons, and the right choice depends on your financial situation, the type of car you’re buying, and your repayment capacity. In this article, we’ll break down the key differences, advantages, and disadvantages of car loans vs personal loans to help you make an informed decision.
What is a Car Loan?
A car loan is a secured loan specifically designed for purchasing a vehicle. The car itself acts as collateral, meaning the lender can repossess the vehicle if you default on your payments.
Key Features:
- Loan amount is limited to the on-road price of the car.
- Can only be used for vehicle purchases.
- Usually comes with lower interest rates.
- Tenure ranges from 1 to 7 years.
What is a Personal Loan?
A personal loan is an unsecured loan that can be used for any purpose—including buying a car. Since there’s no collateral, lenders assess your credit score, income, and repayment capacity before approval.
Key Features:
- No restrictions on usage.
- Generally comes with higher interest rates.
- Faster processing and disbursal.
- Tenure ranges from 1 to 5 years.
Car Loan vs Personal Loan: Quick Comparison Table
| Feature | Car Loan | Personal Loan |
|---|---|---|
| Type of Loan | Secured (against car) | Unsecured |
| Usage Restriction | Only for vehicle purchase | Can be used for any purpose |
| Interest Rate (2025 avg.) | 8% – 12% p.a. | 10% – 18% p.a. |
| Loan Tenure | 1 to 7 years | 1 to 5 years |
| Loan Amount Limit | Up to 90–100% of car’s value | Based on credit profile |
| Processing Time | Moderate | Usually faster |
| Collateral Requirement | Yes (the car) | No |
| Risk of Repossession | Yes, if you default | No, but credit score will drop |
| Ownership of Car | Held by lender until loan is repaid | Fully yours from the beginning |
Pros and Cons of Car Loans
✅ Advantages:
- Lower interest rates due to secured nature.
- Longer tenure options reduce EMI burden.
- Easy to avail from banks, NBFCs, and even car dealerships.
- Minimal documentation for salaried individuals.
❌ Disadvantages:
- Car remains hypothecated to the lender.
- Limited to purchasing a car—can’t use for insurance, accessories, or registration costs.
- Down payment may be required for used cars or premium models.
Pros and Cons of Personal Loans
✅ Advantages:
- No collateral required.
- Can be used for car, insurance, accessories, repairs, or even holidays.
- Instant disbursal from digital lenders.
- Ideal for used cars or older models not covered under car loan schemes.
❌ Disadvantages:
- Higher interest rates, especially for low credit score individuals.
- Shorter tenure, which may lead to higher EMIs.
- May reduce eligibility for other loans (e.g., home loan).
When to Choose a Car Loan
You should opt for a car loan if:
- You are buying a new or certified used car from a dealership.
- You want to enjoy lower interest rates.
- You don’t need additional funds for registration, insurance, or accessories.
- You are comfortable with the car being hypothecated until repayment.
When to Choose a Personal Loan
You should consider a personal loan if:
- You are buying a used car from an individual seller.
- You want funds for other expenses like insurance, car modification, or travel.
- You don’t want your vehicle to be used as collateral.
- You have a high credit score and can negotiate better personal loan terms.
EMI Example: Car Loan vs Personal Loan
Let’s say you’re buying a car worth ₹8,00,000 and comparing a car loan vs personal loan for the same amount over 5 years.
| Parameter | Car Loan (10% p.a.) | Personal Loan (14% p.a.) |
|---|---|---|
| Loan Amount | ₹8,00,000 | ₹8,00,000 |
| Tenure | 5 years | 5 years |
| EMI | ₹16,998 | ₹18,604 |
| Total Interest Paid | ₹2,19,880 | ₹3,16,240 |
| Total Repayment Amount | ₹10,19,880 | ₹11,16,240 |
Insight: A car loan can save you nearly ₹1 lakh in interest over 5 years!
Credit Score Impact
Both loans impact your credit score differently:
- Car Loan: Being a secured loan, it’s slightly easier to get approved, even with a moderate credit score.
- Personal Loan: Requires a strong credit profile. Any missed EMI can heavily affect your credit rating.
Maintaining timely payments improves your credit score in both cases.
Tax Benefits: Any Differences?
Neither a car loan nor a personal loan for a personal vehicle offers tax benefits.
However, if the car is being purchased for business use, you may be able to claim:
- Interest on loan as a business expense
- Depreciation of the vehicle
Consult a tax advisor if this applies to your situation.
Documentation Required
✅ Car Loan
- Identity proof, address proof, PAN
- Salary slips / ITR
- Bank statements (3–6 months)
- Proforma invoice from car dealer
✅ Personal Loan
- Identity proof, address proof, PAN
- Salary slips / ITR
- Bank statements (3–6 months)
- No vehicle-related documents needed
Popular Lenders in India Offering Both Loans
| Lender | Car Loan Interest Rate | Personal Loan Interest Rate |
|---|---|---|
| HDFC Bank | 8.50% – 11.50% | 10.50% – 16.00% |
| SBI | 8.75% – 12.00% | 10.30% – 14.50% |
| ICICI Bank | 9.00% – 13.00% | 10.75% – 17.00% |
| Axis Bank | 9.25% – 12.50% | 10.49% – 15.50% |
| Bajaj Finserv | N/A | 11.00% – 18.00% |
Rates as of 2025; may vary based on credit profile.
Final Verdict: Which One is Better?
The decision between a car loan and a personal loan comes down to your specific needs:
Choose a Car Loan if:
✅ You’re buying a new vehicle
✅ You want lower EMIs and interest rates
✅ You’re okay with the car being hypothecated
✅ You need a longer tenure
Choose a Personal Loan if:
✅ You want more flexibility with how you use the funds
✅ You’re buying a second-hand car from a private seller
✅ You don’t want to pledge the vehicle as security
✅ You have a strong credit profile to get lower rates
Frequently Asked Questions (FAQs)
1. Can I buy a used car with a car loan?
Yes, many banks offer used car loans, though the interest rate may be slightly higher and the loan-to-value (LTV) lower.
2. Will my credit score affect car loan approval?
Yes, though car loans are secured, a high credit score (750+) improves your chances of approval and better interest rates.
3. Can I prepay either loan early?
Yes, both can be prepaid. However, check with your lender about prepayment charges or penalties.
4. Which is faster to get: a car loan or a personal loan?
Generally, personal loans are disbursed faster, especially through fintech apps.