Last Updated on August 9, 2024 by Ali Hamza
If you’re looking to make a large investment, such as a car or wedding, you may want to take out a loan to pay for it. Two of the most popular lending options are personal loans and car loans. They can be reasonably simple to procure if you satisfy their respective lending conditions. However, there is a significant distinction that you must remember first. A personal loan can be used for a myriad of purposes, like purchasing a car, whereas a car loan is solely for the purchase of a vehicle. Each loan form has its own set of advantages and disadvantages, which should be measured and compared before making any commitment.
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What is a personal loan?
A personal loan gives an individual a lump amount of money from a lending institution that they can use however he or she wants. A personal loan may be guaranteed against anything of worth, such as a car or a home, enabling the lender to take the collateral in order to recoup the loss or damage if you fail to pay the loan. The majority of citizens, however, want an unsecured loan, which ensures the loan is not secured by anything. The interest rate and the loan duration are two important factors that influence the overall amount owed on a loan. Unsecured loans, on the whole, have higher interest rates than secured loans with collateral. Unsecured personal loans have even stricter eligibility criteria, meaning you’ll need to have good credit to qualify. Both the loan amount and the interest rate, which may be set or variable, are influenced by the creditworthiness. The higher your credit score, the more you can borrow and the cheaper the interest rate will be. Personal loans have a fixed repayment duration, which starts from 12 months and may last till 36 months respectively. Longer loan periods will increase your monthly payment, but you will incur higher interest over the loan’s period. Shorter loan periods, on the other hand, entail higher monthly payments, but lower overall interest rate charged on the loan amount.
What is a car loan?
A car loan is backed against the vehicle you want to buy, so the vehicle acts as security for the loan. The lender has the right to confiscate your vehicle if you fail to repay the loan. Throughout the loan period, the loan is repaid in fixed instalments. The lender holds possession of the asset before you make the final payment, similar to a mortgage. Since the lender has financial leverage over the vehicle and the loan is secured, the loan is considered lower risk, resulting in a lower interest rate for the applicant. Borrowers are not exposed to the fluctuations that may be seen with unsecured personal loans since interest rates are fixed with car loans. Because it is a secured loan, it is possible that anyone with a poor credit record will be approved. A credit score of 750 or higher can qualify you for a lower interest rate. A credit score of 650 to 750, on the other hand, will have a marginally higher interest rate. There are a variety of lending options available to help you finance your new or used vehicle purchase. You should compare the interest rates of various banks/NBFCs like Money View and car financing companies to find the best deal. Prior to deciding on a loan strategy, you should always aim to choose one with the lowest interest rate and the shortest loan term available. The majority of car loans tenure start from 2 years and can go up to 7 or 10 years according to some banks. Similarly to a personal loan, the shorter the period, the higher the monthly payment, and conversely. Unlike a personal loan, a poor credit record will not actually prevent you from getting a car loan. It would also have a smaller effect on the interest rate or loan amount, which is determined by the car’s worth.
Tax benefits on personal loans and car loans
A tax deduction on a personal loan is available under Section 24(b) of the Income Tax Act of 1961 if the money is used for home renovation. Interest paid on personal loan repayments up to Rs. 30,000 can be exempted from overall taxable income in this situation. However, if it is a home that you purchase and reside in, you can subtract up to Rs 2 lakh. If you rent a home, you can exempt the overall interest paid on the loan from your taxable income. If you are a self-employed individual who uses the car for business purposes, on the other hand, a car loan will help you to claim tax benefits. However, unlike a Home Loan, a salaried employee cannot seek tax benefits for Car Loan interest repayments. In India, a car is considered a luxury asset, and it currently has the highest Goods and Services Tax (GST) rate of 28 percent. As a result, if you are purchasing a car for personal use, you will not be liable for any loan deductions. Section 80EEB allows you to deduct up to Rs 1,50,000 in interest payments. Individual taxpayers are allowed to own an electric vehicle for personal or business use. This deduction would make it easier for those who own an electric car for personal use, to seek the interest they pay on the loan.
Can someone avail a car loan and a personal loan at a time?
If you’ve ever taken out a loan, you know how tough it is to manage only one loan, let alone two. However, this would not rule out the possibility of taking out two loans at the same time. You might, though, need to precisely prepare your financial strategy, including your monthly expenditures for the near future. Availing two loans at a time is completely dependent on your needs. However, managing the repayment of two loans, particularly a car loan and a personal loan, is quite difficult. The explanation for this is that car loans have a much longer repayment period than personal loans. Furthermore, the interest rates on car loans and personal loans are vastly different. Furthermore, it may be perfectly doable if you schedule your EMIs carefully, picking the right tenure and interest rate, and not missing repayments on both loans. Moreover, if you take out two loans, your credit score may get affected. However, if you manage to make regular payments to reimburse the loan amount it will not be a key issue.
Conclusion
If you are purchasing a car or pursuing higher education, both of these factors arise in mind i.e. where to get the loan and how to get the loan. Many people choose an auto loan which is financed by the dealer when purchasing a new vehicle because it is easy and comfortable. However, in some situations, obtaining a personal loan could be more beneficial if it is to finance your personal finance goals such as a wedding, higher education and so on. To make a skilled opinion, ensure you have a good credit score, thoroughly research lending institutions’ interest rates and loan terms, and choose a lender with a simple and quick loan approval process.
Apart from that, if you are interested to know about Home Renovation Loan Rates then visit our Finance category.
