Car Loan vs. Personal Loan – Best Way to Finance a Car in India (2025)
Buying a car is a big financial decision, and most Indian buyers consider some form of financing to make the purchase manageable. In 2025, with rising car prices and attractive financing options, two common choices are: Car Loans and Personal Loans. While both offer funding, they differ in terms of interest rates, documentation, ownership clauses, and flexibility.
In this post, we will compare car loan vs. personal loan in detail to help you decide the best option for your next car purchase.
1. What is a Car Loan?
A car loan is a secured loan offered specifically to purchase a vehicle. The car you buy becomes collateral, which means the bank or NBFC has a legal right over it until the loan is repaid in full.
Key Features:
- Lower interest rates (typically 8%–12% per annum)
- Only usable for car purchase
- Longer tenure: 1 to 7 years
- Loan-to-value (LTV) up to 90% or even 100% in some cases
- Vehicle ownership stays hypothecated to the lender until repayment
2. What is a Personal Loan?
A personal loan is an unsecured loan, meaning no collateral is needed. You can use the loan amount for any purpose — including buying a car, funding a vacation, or paying medical bills.
Key Features:
- Higher interest rates (usually 10%–18% per annum)
- No collateral or hypothecation
- Flexible usage – not tied to a vehicle
- Tenure usually 1 to 5 years
- Faster processing but lower approval amount
3. Pros and Cons of Car Loan
Pros:
- Lower interest rates due to collateral
- Higher loan amounts for expensive vehicles
- Special tie-ups with dealerships may offer discounts
Cons:
- Only applicable for car purchase
- Vehicle hypothecation until full repayment
- Requires more documentation and dealer coordination
4. Pros and Cons of Personal Loan
Pros:
- No restriction on usage
- No vehicle hypothecation — car is fully yours
- Faster disbursal and easier to apply for online
Cons:
- Higher interest rates due to unsecured nature
- Smaller loan amounts
- Shorter repayment tenure means higher EMIs
5. Which One Should You Choose?
Choose Car Loan if:
- You want a lower interest rate
- You’re buying a new car
- You’re okay with the car being collateral for a few years
- You want to avail longer tenure for affordable EMIs
Choose Personal Loan if:
- You’re buying a used car or want to pay off in cash
- You don’t want any hypothecation or extra paperwork
- You qualify for a low-interest unsecured loan (like salaried professionals with high credit scores)
- You want full ownership from day one
6. Tax Implications
Neither car loan nor personal loan offers direct tax benefits unless the car is used for business purposes. In that case, the interest paid may be claimed as an expense under business income.
Final Verdict
In most cases, car loans are better suited for purchasing new cars due to their lower interest rates and structured repayment. Personal loans are better if you value flexibility, are buying a used car, or are self-employed with unpredictable income.
Before choosing, compare offers from different banks and NBFCs, and use an EMI calculator to plan your budget. Check your credit score, negotiate interest rates, and read the fine print for any hidden charges.
In 2025, both car loans and personal loans are easily accessible online. Choose the one that fits your financial comfort, car model, and repayment discipline.