Buying a car—whether it’s new or just “new to you”—can be fun and exciting. But financing a car? Not so much. Sidestep the stress by nailing down your finances before you start shopping.
Here’s what you should know about car loans versus personal loans when you’re purchasing a car, so that you can make the best decision for your budget and requirements.
Personal loan vs. auto loan: Key differences
What is a personal loan?
Personal loans are simple, versatile products you can use to finance many things. They are sometimes called signature loans. Here are their main characteristics:
- Personal loans are usually unsecured and don’t require collateral.
- You can use them to finance almost anything (although some lenders may restrict certain uses and terms vary according to use).
- Interest rates are fixed.
- They’re available in loan amounts from $1,000 to $100,000.
- Terms range from one year to 12, or even 15 years.
In addition to cars, consumers choose personal loans to finance home improvements, education, business startup costs, weddings, medical procedures, travel, and more. They are also popular for consolidating credit card debt.
Personal loan pros and cons
Pros:
- Because personal loans are unsecured, borrowers don’t have to put up collateral. If you don’t pay your loan as agreed, the lender can’t repossess your car.
- Borrowers can finance older cars, cars that need work, vintage cars, or show cars.
- Borrowers can buy from corner-lot dealers or private parties—not just certified dealers.
- Because they’re multipurpose loans, you may be able to meet several needs with a single loan. For instance, one personal loan could help you buy your car, consolidate credit card debt, and pay for your wedding.
- Fixed interest rates make budgeting easier. Your rate and payment don’t change over the life of the loan.
- Longer repayment terms can make your payment more affordable.
- There’s no down payment requirement to buy a car with a personal loan.
Cons:
- Loans without collateral are riskier for lenders and force them to charge higher interest rates. The Federal Reserve says that 24-month personal loan rates averaged 12.49% in early 2024.
- Loan approval is more difficult for credit-challenged borrowers.
There may be exceptions. While personal loan interest rates tend to be higher overall than auto loans, for instance, the gap is quite narrow for people with top-grade credit. LightStream, for example, advertises personal loan rates from 9.49% to 25.49%.
LightStream Personal Loan Credible
Loan amount
$5,000 to $100,000
What is a car loan?
Auto financing has one purpose: to finance a vehicle purchase. Traditional auto loans come from car dealers, banks, credit unions, online lenders, and other institutions. They are the best and cheapest route for most buyers.
- Auto loans are secured by the vehicle you use your loan to purchase.
- Auto loans can only be used to finance cars.
- Interest rates are fixed.
- Standard loan terms are two to eight years.
- Typical loan amounts range from $5,000 to $100,000. CarMax dealers offer subprime loans with loan amounts as low as $500.
- Auto lenders must approve the vehicle, in addition to the borrower. Down payments aren't required in all cases, but 20% is standard, according to Kelly Blue Book.
- Dealerships that want to move certain models may offer interest-free or low-interest promotional financing at below-market rates. These generally require excellent credit.
Car loan pros and cons
Pros:
- Auto loan interest rates run lower than personal loan interest rates. According to FICO, five-year auto loan interest rates for new cars average 7.5% for top-drawer credit scores, 8.6% to 12.6% for fair-to-good scores, and over 17% for subprime loans.
- Subprime auto loans are widely available for credit-challenged buyers.
- Dealers may offer promotional, zero-interest financing.
Cons:
- To access the best interest rates, you’ll need a down payment. The standard amount for a new car is 20%.
- Auto lenders impose restrictions covering the age, mileage, and condition of the cars they finance. The most affordable cars may be the most difficult to finance.
- If you don’t make your payments, the lender can repossess your car.
Remember that while auto loans may come with generally lower interest rates than personal loans, the best rates aren’t likely to come from a dealer. Dealerships earn commissions on financing deals, and their profit increases your cost.
When is a personal loan better than a car loan?
In general, auto loans are cheaper than most personal loans for the majority of car buyers. However, there are instances when you might be better off with a personal loan, such as:
- You want to purchase a car that doesn’t meet these auto lending guidelines: under 10 years old, with low mileage, and not in need of substantial repairs.
- You want to buy with no down payment.
- You also want to borrow additional money for other purposes, such as a vacation, home improvement, or to consolidate debt.
- You don't want to put up your vehicle as collateral.
There are exceptions to some rules when auto lending is involved. You can’t go wrong by contacting personal loan providers and auto lenders before you shop for a car in order to select the lender that’s right for you.
When is a car loan better than a personal loan?
A car loan is better than a personal loan for most borrowers and in the majority of scenarios. If you plan to buy a new car—or a late-model used car from a traditional dealer—a car loan is probably right for you. That said, unless you can get zero-interest financing from a dealer, get preapproved for your car loan elsewhere and then challenge the dealer to beat it.
Getting a personal loan vs. an auto loan: How to apply
The application process is similar for personal loans and auto loans.
- Usually, you can prequalify for an auto or personal loan and see your interest rate without a hard credit check. That helps you minimize the number of formal loan applications (with hard credit pulls that reduce your credit score).
- You’ll complete an application and list your debts, payments, assets (like bank balances), and income.
- Expect to provide proof of income and bank statements. You’ll also need to authorize a full credit check.
- It takes longer to get auto loan approval from a bank (or other lender) outside the dealership. Plan on a week to be safe. Loans through the dealership can take just hours, but you’ll usually pay a higher rate.
- Some personal loan providers offer same-day processing and funding, but most take at least a day or two from the time of application to receive funding. Usually, the lender deposits the funds into your bank account electronically.
- Auto lenders usually issue a check for your loan proceeds, either for pickup or through the mail. PenFed says on its website, “Auto loan checks are written as two-party checks, made payable to you and the dealer, private seller, or financial institution.”
Whether you choose to finance your car with a personal loan or an auto loan, you’ll have an easier time if you shop for your loan before you shop for your car. And, get preapproved for your financing before negotiating with a seller.
Time Stamp: Car loans are usually (but not always) better than personal loans for auto purchases
You can use a car loan or a personal loan to buy a car. For most people, a car loan is better because interest rates tend to be lower. However, personal loans may be the right choice if you’re not buying a new or late-model used car, you also want to borrow for other things, or if you don’t have a down payment.
Frequently asked questions (FAQs)
Is an auto loan or personal loan better?
For most buyers, an auto loan is a better deal than a personal loan; you can compare them directly and choose what’s right for you. Most auto and personal loan providers will let you prequalify and get a loan quote without a hard credit check. That’s also a good time to make sure that the lender will accept the type of car you plan to buy and the seller you wish to use.
Is it easier to get a car loan or personal loan with bad credit?
It’s easier (and cheaper) to get a subprime car loan than a personal loan with bad credit. That’s because the auto lender can repossess the car if you don’t repay the loan. Personal loans are generally unsecured, with no collateral. That makes them riskier for lenders and harder to get if your credit isn’t good.
Is it better to finance a car with a bank?
It’s usually better to get your car loan from an outside source, such as a bank, credit union, or online lender. That’s because dealers earn a profit when arranging a loan (in addition to the interest and fees you’ll pay the lender)and that increases your cost.
However, dealers work with many lenders and can arrange a loan if you have poor credit. Dealer financing can be better if the model you want comes with promotional financing—like a zero-interest loan.
What is the difference between a personal loan and a car title loan?
A personal loan is usually unsecured and requires no collateral. Interest rates are typically 6% to about 36% with most mainstream lenders. Loan terms range from one year to 12 years.
Auto title loans are secured by your car. Their terms are only 30 days, and, typically, interest is 25% per month. (That’s about 300% per year.) Auto title loans are more similar to payday loans than personal loans or traditional car loans.
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