Is a Personal Loan better than a Car Loan?

car loan vs personal loan

When you are planning to buy a car, there are many factors you need to consider; finances being one of the most important ones. Usually, you take a car loan to buy a car. However, a thought of getting a personal loan may creep into your mind. Are you in a fix and unable to decide which one is better?

On one end, you may think a personal loan is better because of the longer repayment tenure. It may seem favourable because you don’t have to provide collateral. However, it is good to make a detailed analysis of the pros and cons of both, personal and car loan before you make a decision.

Personal Loan—Analysis

Here is a number of factors about personal loans that are to be considered while scrutinising if it is the right choice to make at this point.

  • Unsecured Loan
  • A personal loan is an unsecured loan where you don’t have to provide collateral or guarantor. A guarantor or collateral will be required only if your income documents are not convincing or if you are looking for a loan amount beyond the one you are eligible for.

    If you don’t want to provide your car as collateral, you could think of a personal loan.

  • Cost of the Loan
  • The cost of the loan depends on the interest rate and the repayment period. Generally, a personal loan includes a repayment tenure of 5 years. A few banks provide up to 10 years for repayment. The interest rates vary with banks and may range from 6% p.a. to 15% p.a. In case of instant approval scheme, you can expect an interest rate of up to 24% p.a.

  • Purpose of Loan
  • Unlike other loans, a personal loan does not cater to one fixed purpose. You can borrow once and use the money for more than one purpose.

  • Illustrations
  • If you need some cash to clear a loan and then buy a car, you could go for one personal loan rather than get two loans—a personal loan and a car loan.

    Another example could be that you have saved about RM35,000 for your down payment. The car you want to buy costs RM44,000. And, the minimum car loan amount you can get is RM20,000. Since you don’t need RM20,000 and borrowing it would lead you to pay extra interest. In this case, you could go for a personal loan rather than a car loan.

Car Loan—Analysis

After reading about personal loans, you must be curious about the details of a car loan. Here you go:

  • Secured Loan
  • Usually, a car loan is also known as a hire-purchase loan where the bank purchases the car for you and you hire it until you pay-off the loan in full. You need to know that the ownership of the car is held by the bank and you are providing the car as collateral for the loan.

    This would be a trouble if you want to use the card for a year or two and then sell it for a newer car model. When you are not the owner of the car, you cannot directly sell it. You have to first pay off the entire loan amount, get ownership of the car transferred to you to be able to transfer the ownership to the buyer.

  • Loan Repayment Tenure
  • The cost of a car loan varies a lot with the age of the car. If you are planning to buy a new car, then you can get a repayment period of up to 9 years. As the age of the car increases, the repayment tenure decreases and may go down to 7 years. In the case of a commercial vehicle, the repayment tenure can further drop down to 5 years.

  • Interest Rate
  • The interest rate varies with each bank and depends on whether the car is national-made or foreign-made. Some banks provide fixed rate, whereas the others provide floating interest rates. Generally, the interest rate ranges from 2.90% p.a. to 7.00% p.a. Some banks also provide financing for unregistered reconditioned cars at a reasonable interest rate. For example, CIMB Hire Purchase Loan comes with a flat rate of 3% p.a. or a minimum variable rate of base lending rate + 1.20% p.a. for unregistered reconditioned cars.

  • Margin of Finance
  • For a new car, banks provide a margin of finance of up to 90%. The rest must be covered with a down payment. When it comes to a used car, you can expect a finance margin ranging from 75% to 85% based on the car’s age. A commercial vehicle can get a margin of finance from 80% to 85%.

  • Illustration
  • Say, you have saved RM10,000 to make a down payment for your favourite car priced at RM50,000. Given that you don’t have any idea of selling the car after a year or two, you can go for a car loan for the money you are falling short of.

    Have you decided on the car you want to buy yet? Do you want to decide on the car based on the loan availability? Then, approaching a bank for a car loan is the better option. So, you can do the math in the reverse direction and choose a car that fits in your budget.

Which One Suits You?

Choosing between a personal loan and a car loan depends entirely on your situation. There is not one standard solution that works for everyone. So, you need to analyse your financial commitments, the availability of cash at hand, the financing amount you are looking for, the total cost of the loan, and the other related factors before you decide on the type of loan. Do not go by anyone’s words. Research for the available loan packages once you decide on the type of loan and then apply for one.

There are many other car expenses you have to handle in addition to paying loan instalments. So, be wise and choose wisely.

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