Buying A Car?

While the auto industry is going through a slowdown, there are plenty of good deals available, and this is a good time to secure your set of dream wheels with deep discounts and premium add-ons. In recent years, Indians have shown they're no longer content with small hatchbacks, a departure from car ownership being the domain of the Indian elite. They have indicated a preference for bigger, faster cars, for which they will happily take bigger loans.

As per BankBazaar data, in 2018, the average ticket size for car loans was `5.72 lakh in metros and `5.21 lakh in non-metros. This brings us to the subject at hand: when it comes to car finance, is it better to take a car loan or a personal loan?

YOUR CREDIT SCORE MATTERS LOOK AT THE INTEREST

To cut a long story short, the interest rates on both forms of loans matter a lot. A car loan is a secured loan, which normally extracts a lower interest rate in comparison to an unsecured loan, which is what a personal loan is. A quick scan of car loans from banks reveals the interest rates to be in the range of 9-15 per cent per annum. However, personal loans start from around 11 per cent, going to 25 per cent and beyond. How much does this impact you? Let's say you borrow `5 lakh for five years. At 10 per cent, your EMI is `10,624 and your total interest is `1.37 lakh. But at 15 per cent, your EMI is `11,895 and your total interest is `2.13 lakh. A car is ultimately a depreciating asset, so you should minimise your spends on it.

So a higher interest on your loan leads to a higher cost of ownership. But there’s more you need to consider.

LONGER TENURE MEANS LOWER EMIs

The size of one’s EMIs is often a major consideration in how much one borrows. Car loan tenures can extend up to seven years in most cases. A typical personal loan will extend up to five. There are exceptions in both loan categories where some bank will provide tenures longer than the norm. However, broadly speaking, your total interest will be likely higher on a personal loan despite a smaller tenure. Let's say you borrowed `5 lakh. With a 10 per cent car loan and a seven-year tenure, your EMI is `8,301 and interest `1.97 lakh. With a 15 per cent personal loan and five-year tenure, your EMI is `11,895 and interest `2.13 lakh. The actual math will vary from one lender to another, and from one loan product to another, and so you must make these calculations before deciding between the two options.

With any kind of borrowing, your credit score matters. With a good credit score (ideally, 750 or more), you have better chances of bagging a low-cost loan with minimum hassles, especially if you're a salaried person. However, with a lower credit score, the personal loan may become your only loan option, and the price you pay for this is a higher interest rate.

In summary, a car loan with lower interest rates and longer tenures can be your go-to option. However, personal loans allow you to borrow bigger without the hassles of the loan-to-value ratio or hypothecation of your property, but at a higher interest rate. The choice is yours.

The writer is CEO, BankBazaar.com

CAR LOANS MEAN RESTRICTED BORROWING

Banks will not fund 100 per cent of your car purchase cost. They’ll only cover a part of it. Most banks will finance up to 100 per cent of the car's showroom price, which leaves you to bridge the gulf to the on-road price, which includes registration, taxation, insurance etc. If you have the margin money and would prefer a low rate of interest, you should go for a car loan. But if you are short of cash and if the loan-to-value ratio is proving to be a problem, go for a personal loan, which is an open-ended credit and can be used for any purpose you deem fit-even a car purchase. With a personal loan, you can borrow the amount you're eligible

for.

NO HYPOTHECATION WITH PERSONAL LOAN