You have found a great deal on a used car, and so decided you have to take a loan. The seller wants to complete the deal quickly, as they are shifting out of the city. When all you need is a loan, does it matter if you take a used car loan or a personal loan? A used car loan is tailor-made for buying a second-hand car. While a personal loan is ideally not the first choice for purchasing a pre-owned car, but it could be cheaper to get. Here are the advantage and disadvantages of used car loan and personal loan. You decide. Read on.
Advantages of a used car loan
The cost price of a used car will be lower than that of a new car. This also means that the cost of insurance will also reduce in case of a used car. So, in a used car loan, the borrowed amount will be lower.
Generally, a used car loan allows you up to 60 months to repay the loan amount. This is a fair amount of time for you to pay the loan back.
Since a used car loan comes at reasonable interest rates, you do not pay a lot of money as interest. For instance, Tata Capital charges interest rate starting from 12.50% for used car loans.
A used car loan can be repaid with structured EMI. This means this EMI option allows you to select a repayment method that suits you best. This is ideal if you expect your income to increase at regular intervals, helping you to pay off the loan faster.
Disadvantages of a used car loan
Used car loans cover up to 95% of the car value. This means 5% of the money has to be arranged by you from other sources, in case you have no cash. Do remember that paying some money from your pocket is not necessarily a bad thing, because your interest outgo is reduced to that extent. Do note that Tata Capital offers to fund up to 100% of the ex-showroom price on select models.
If you are looking to borrow more than Rs 50 lakh for buying a used car, then a used car loan cannot help you much. Although chances are near zero that you would require a loan of over Rs 50 lakh for buying a second-hand car, factually it is a problem if your loan needs are bigger.
Advantages of a personal loan
There is no limitation on the end-use of a personal loan. This means that you can use a personal loan to buy a used car, and also use some money to do something else like pay for a vacation or buy a new appliance/electronic gadget.
A personal loan requires no collateral. So, you don’t have to run around to arrange for any collateral. It is an unsecured loan. With interest rate on personal loans starting at 11.25% at Tata Capital, this is a fast and cheap way to raise money at short notice.
A personal loan allows you to pre-pay part of the loan any time after 6 months. So, you can pre-pay without any penalty or additional fee. This is a great advantage if you suddenly get a windfall of cash and want to prepay soon.
Disadvantages of a personal loan
Personal loans are unsecured debt, so some financial institutions may have strict processes in place to ensure that only very creditworthy borrowers can get such loans. So, it generally could take about 72 hours for the personal loan amount to be credited to your bank account.
Personal loans are given up to a certain limit. For instance, if your loan requirement is above Rs 25 lakh, a personal loan may not be easy to procure.
There you have it. The purpose of a used car loan is to buy a used car and a personal loan can be used for any purpose. It is always better to consider every possibility before you avail a loan and make an informed decision.