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Auto loan vs personal loan: Which is a better option to buy a new car?

New Delhi: Car makers generally offer attractive deals in the month of December. Plus, interest rates on bank loans have dropped, and dealers want to liquidate year-end stocks by giving attractive discounts as well. So, is it a good time to buy a new car or another big car for the family?

At present, there are many ways to finance a new car. You may visit the local showroom of your preferred car maker to get a better knowledge of not just the features of your new car but also your financing options. The loan taken to buy a new vehicle is a car loan.

Typically, car loans are of three to five years tenure but some banks may offer loans for up to seven years, too. A loan for longer duration may mean smaller equated monthly instalments (EMIs), which make the vehicle seems more affordable, but overall, you pay more as interest. It is important to keep in mind that a car is a depreciating asset, so taking a loan for a longer period may not be the best thing to do.

Some private sector banks, for instance, give a loan for the full ex-showroom price of the car, while others may offer a loan up to 80 per cent. A car loan can be taken only for the purpose of purchasing 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 security, which is the vehicle itself. When you take a loan from a bank to buy a car, the car gets hypothecated to the bank. Simply put, the car is being hypothecated to the bank will remain in the possession and use of the borrower. Unfortunately, if you fail to repay your loan, the bank can repossess the car to recover its dues.

A personal loan, on the other hand, is an unsecured loan provided without any collateral. Plus, the lender does not ask the reason for taking such a loan. You can take a personal loan for a dream holiday abroad, to refurbish your home or even buying your dream car. More importantly, since it is an unsecured loan, your car is not hypothecated to the bank, and, therefore, cannot be repossessed by the bank. However, your credit score takes a beating and failure to repay the loan will attract stringent legal actions.

Banks or auto finance companies have interest rates ranging from 9 per cent to 15 per cent per annum. However, a personal loan from the same bank may charge 10.35 per cent to 21.5 per cent per annum. Also, a car loan from an auto finance company has to be paid back in maximum five years.

Let’s check the impact on your pocket from the differing rates.

Consider you have taken a loan of Rs 5 lakh for five years. On a car loan at 10 per cent interest, your equated monthly instalment (EMI) will be Rs 10,624 and your total interest will be Rs 1.37 lakh.

A personal loan, for instance, of Rs 5 lakh taken for five years at an interest rate of 16 per cent will mean an EMI of Rs 12,159. The total interest cost will come to about Rs 2.29 lakh over the tenure of the loan.

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

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