How car loans work
Secured Car Loan: How the Car Secures Your Loan
Why a car loan costs less than a personal loan, what hypothecation means and what happens if you default.
Updated 27 September 2026 · 8 lenders trackedLowest car loan rate
7.45%
Canara Bank Car LoanWhat you need to know
A car loan is secured by hypothecation of the car itself — the bank has a charge on the vehicle, recorded on the RC, but the car stays with you. Because the bank can repossess the car if you default, car loans are priced well below unsecured personal loans.
Car loan vs personal loan for a car
| Point | Car loan | Personal loan |
|---|---|---|
| Security | Car hypothecated to bank | None |
| Rate | From about 7.45% – 8.40% at major banks | Usually noticeably higher |
| Tenure | Up to 7 – 8 years | Usually shorter |
| Funding | Up to 85% – 100% of on-road price | Any purpose, based on income |
| RC | Hypothecation noted; needs NOC to remove | Clean RC from day one |
| Prepayment | Nil on floating; 2% – 6% on some fixed | Depends on lender and rate type |
If you miss EMIs
- Penal charges apply (a fixed charge, not penal interest, under RBI rules since 1 Jan 2024)
- Missed EMIs are reported to credit bureaus and hurt your score
- After continued default the bank can repossess the car through a lawful process and sell it; any shortfall is still recoverable from you
- Talk to the bank early — restructuring or a revised schedule is often possible
Frequently asked questions
Can I take a car loan against a fixed deposit instead?
A loan against FD is also secured and can be cheap, but it locks your deposit; a car loan keeps your savings free.
For information and comparison only. Loan terms, rates and rules change — confirm with the lender and read the Key Facts Statement before borrowing.