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Tata Capital > Blog > Loan for Vehicle > Personal Loan vs Used Car Loan: Which Is Better for Second Hand Car Purchase?

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Personal Loan vs Used Car Loan: Which Is Better for Second Hand Car Purchase?

Personal Loan vs Used Car Loan: Which Is Better for Second Hand Car Purchase?

The pre-owned or used car market in India has been growing in double digits. A lot of people are opting for used cars rather than buying a new one due to constrained budget, or just for the sake of refining their driving skills before buying a new car.

Are you also planning to buy a pre-owned car and are confused between a used car loan or a personal loan? In this guide, we break down the key differences between a personal loan and a used car loan to help you choose the most suitable financing option for your second hand car purchase.

Personal Loan vs Used Car Loan: Key Differences

Here are the key differences to consider when choosing between a personal loan and a used car loan for financing a pre owned vehicle.

  • Interest and Collateral: Personal loans are unsecured and generally charge higher interest, while used car loans are secured against the vehicle, often resulting in lower interest and easier lender approval.
  • Fund Usage: A personal loan for second-hand car lets you receive the full loan amount without a down payment, whereas a used car loan usually covers 70-80% of the car value, needing you to fund the rest.
  • Loan Size: Used car loans can finance more expensive vehicles with larger loan amounts, but personal loans may suit lower-priced purchases under Rs 5 lakh.
  • Approval Process: Personal loans typically have a faster application and disbursal process, while used car financing involves the seller, buyer and lender, extending the timeline slightly.

Choosing between car loan vs personal loan depends on interest costs, down payment ability and your credit profile.

Important Things to Consider Before You Decide

Here are the things that you need to consider before you decide:

  1. Focus on the Interest Rates

A large chunk of your EMI goes in paying the interest on the loan. Therefore, you should take a loan which offers you the lowest interest rate. Usually, the interest rates for personal loans range from 11% to 24% while for used car loans, it is between 14% – 18%. However, a lot depends on your CIBIL score, employment, age and income. If these are on the right track, the bank can offer you lower interest rates.

  1. Loan Amount

If you opt for a used car loan, lenders evaluate your car and offer you a loan amount based on this value. This ranges from 70 to 90% of the valuation amount. For example, if your car is worth Rs. 7 lakhs and the lender values it at Rs. 6 lakhs, then the lender will value your car between 70 to 90% of Rs. 6 lakhs, which ranges between Rs. 4,20,000 to Rs. 5,40,000. The rest of the amount will be your down payment. The advantage of a personal loan is that you can use the entire loan amount and also skip the valuation process.

  1. Tenure

Tenure plays a major role in getting a used car loan. Usually, you won’t get a loan for a pre-owned vehicle that’s beyond 5 years. The older the vehicle, the shorter will be the tenure of your loan, which means higher EMIs per month but faster repayment of the principal amount. However, if you opt for a personal loan, you will get a tenure of up to 5 years to repay the loan. That’s regardless of the car’s age or condition. The longer the tenure, the higher the interest rate. 

  1. Your Credit Score

Have a poor credit score? A used car loan can really come to the rescue. That’s because a personal loan is an unsecured loan, therefore it is only handed out to people with a reliable credit score and income. Used car loans are secured, that’s why even if you have a poor credit score, you can still get a quicker loan approval and drive that car you’ve been waiting for.

  1. Quicker Loans for a Fast Moving World

Here again, the tides are in favour of personal loan as you can get it processed within 1 to 5 days. The process for used car loan is more tedious and longer as it involves more paperwork. That’s because the lender has to check all the car documents and also go through a thorough examination and valuation of the car. This process usually takes a week or more to disburse.

Also, read –What Is Used Car Loan Refinancing?

Pros and Cons: Personal Loan for Second Hand Car

Here are the key pros and cons of using a personal loan for second-hand car purchase: 

Pros of Using a Personal Loan for a Second-Hand Car Purchase:

  • Flexibility: Personal loans can be used for the car and related expenses without purpose restrictions, offering greater financial freedom.
  • No Collateral: You do not need to pledge the vehicle or any asset, reducing the risk of losing property during repayment.
  • Full Loan Amount: You may access the entire approved amount without vehicle valuation, helping cover the full cost of a used car.
  • Quick Approval: The application and disbursal process is faster than secured loans, allowing you to act quickly on a good deal.

Cons of Using a Personal Loan for a Second-Hand Car Purchase:

  • Higher Interest Rates: These loans usually carry higher interest than secured used car financing, increasing the overall borrowing cost.
  • Strict Eligibility: Lenders may require a strong credit profile and stable income, making approval harder for some applicants.

The choice should depend on financial strength, urgency and long term repayment comfort.


Also, read – A Step-by-step Process for getting a Used-car Loan

Pros and Cons: Used Car Loan for Second Hand Car

Pros of Used Car Loan for a Second Hand Car: 

  • Lower Interest Rates: Used car loans are secured against the vehicle, allowing the Lender to offer lower interest rates than unsecured borrowing.
  • Higher Loan Value: Financing is linked to the car’s value, enabling access to larger loan amounts for higher priced used vehicles.
  • Flexible Tenure: Lenders offer structured repayment tenures, helping borrowers manage EMIs with predictable monthly outgo.
  • Improved Approval Chances: The vehicle acts as security, making approval easier even with moderate credit profiles.

Cons of Used Car Loan for a Second Hand Car:

  • Restricted Usage: Funds can only be used for vehicle purchase, unlike a personal loan for second-hand car–related expenses.
  • Down Payment Requirement: Borrowers must arrange part funding, especially when comparing car loan vs personal loan options.

The choice should depend on affordability, vehicle value and long term repayment comfort.

Car Loan vs Personal Loan: Eligibility and Documentation

Here are the key eligibility and documentation aspects to consider when comparing a car loan and a personal loan.

  • Eligibility Criteria: Used car loans focus on borrower income and the vehicle’s age and condition, while personal loans rely mainly on income stability and credit score.
  • Age and Employment: Lenders specify minimum age, employment type and work experience for both options, with stricter checks for unsecured loans.
  • Income Proof: Salary slips, bank statements and income tax returns are required to assess repayment capacity across both loan types.
  • Property and Vehicle Documents: Used car loans require RC details and valuation papers, unlike personal loans that need no asset documents.
  • Approval Comparison: When evaluating car loan vs personal loan, secured loans usually involve more documentation but slightly relaxed credit thresholds.

How to Decide: Used Car Loan vs Personal Loan for Your Needs

Here are the key factors to consider when deciding between a used car loan and a personal loan for your needs.

  • Budget Assessment: Evaluate the car value and your savings, as used car loans may require a down payment while personal loans can cover wider costs.
  • Interest Sensitivity: Secured used car loans usually offer lower interest, whereas unsecured options suit borrowers prioritising speed over cost.
  • Purpose Flexibility: A personal loan for second-hand car purchase allows funds to be used for insurance, repairs and registration without restrictions.
  • Credit Profile: Lenders assess income stability and credit score, with secured loans often accommodating moderate profiles.
  • Repayment Comfort: Choose a tenure and EMI that align with cash flow and long term financial goals.

Why Choose Tata Capital for Personal and Used Car Loans

Be it a personal loan or used car loan, Tata Capital offers you both options with the lowest interest rate and the quickest disbursal of your loan.

Tips to Get Best Loan Terms for Second Hand Car

Here are practical tips to secure the best loan terms when buying a second hand car.

  • Compare Lender Offers: Review interest rates, processing fees and tenure options to identify the most cost effective deal.
  • Check Credit Score: A healthy credit profile improves negotiation power and helps secure lower interest rates and better terms.
  • Assess Car Value: Ensure accurate vehicle valuation, as it directly influences loan eligibility and approved amount.
  • Choose the Right Loan Type: Evaluate affordability and flexibility carefully when deciding between car loan vs personal loan options.
  • Negotiate Charges: Ask the Lender about waivers on processing fees or prepayment charges to reduce overall borrowing cost.
  • Plan EMI Comfort: Select a tenure that balances manageable EMIs with lower total interest outgo.

Also, read – How to Pay Off Used Car Loan Faster?



Common Mistakes When Choosing Financing for Used Cars

Here are common mistakes to avoid when choosing financing for a used car.

  • Ignoring Total Cost: Focusing only on EMI while overlooking interest rates, fees and tenure can significantly increase the overall borrowing cost.
  • Overlooking Credit Score: Not checking your credit profile may lead to unfavourable terms or higher interest from the Lender.
  • Wrong Loan Selection: Failing to compare used car loan vs personal loan options can result in reduced flexibility or higher expenses.
  • Skipping Vehicle Checks: Poor valuation or incomplete documentation can delay approval or reduce the sanctioned amount.
  • Stretching Repayment: Choosing longer tenures without assessing cash flow may strain finances despite lower monthly EMIs.

Conclusion

If you have a good credit score then a personal loan might be better since you will get a better interest rate, lesser documentation and quicker processing of your loan. If you are struggling with your credit score then a used car loan is a better strategy as it comes with collateral security of your car, has a shorter tenure and lesser repayment of interest in the long-term.

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FAQs

What is the difference between a used car loan and a personal loan for buying a second hand car?

The difference between car loan vs personal loan lies in security and usage, as used car loans are vehicle backed while personal loans are unsecured and offer spending flexibility.

Which has lower interest rates: personal loan or used car loan for a car purchase in India?

Interest rates are usually lower for used car loans, as the vehicle secures the Lender, whereas personal loan vs used car loan comparisons show unsecured options cost more in India.

Can I use a personal loan for buying a pre-owned car?

Yes, you can use a personal loan for second-hand car purchases, as lenders do not restrict usage, allowing funds for the vehicle, insurance, registration and initial repairs.

What are the pros and cons of getting a personal loan for a second hand car?

Pros include quick approval and flexible usage, while cons involve higher interest and stricter eligibility, making personal loans suitable for urgency but less cost efficient long term.

How do I decide between personal loan vs used car loan for a used car?

To decide whether a car loan or vs personal loan is better, assess interest sensitivity, down payment ability, credit profile, and whether flexibility or lower cost matters more for your car purchase.

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