If you’re looking for a loan to finance buying a car, you have 2 main options: a personal loan, or a designated auto or car loan. Although they are both loans, with terms and interest rates, they are very different types of financing.
Essentially, a car loan is designed only for buying a car. Usually, you’ll get a car loan from your dealership, although there are also online lenders that offer auto loans. Your auto loan is secured against the car that you buy, and will usually have fixed interest rates for a longer term.
A personal loan is available from a few different lenders; banks, credit unions, or online lenders, to name a few. You can use a personal loan for many different purposes, like paying for a vacation, financing a wedding, or carrying out home repairs, as well as for buying a car. Personal loans are much more varied since they could be secured or unsecured, have fixed or variable rates, and be long term or short term.
If you’re trying to decide whether an auto loan or a personal loan is better for buying a car, we help you to weigh up the pros and cons of each option and make an informed decision for your new car purchase.
Auto Loans vs. Personal Loans: The Essentials
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|
Auto Loan | Personal Loan |
|---|---|---|
| Flexibility of use |
Only for buying cars under a certain age | Buying a car of any age, upgrading the sound system, vacations, etc |
| Do you need good credit? |
No | Yes |
| How long does it take to get a loan |
Almost instant | Can take up to a few days online or a few weeks at your bank |
| Fixed or variable rate? |
Fixed rate | Fixed or variable |
| Early prepayment penalties |
Yes | No |
| 0% financing available |
Yes | No |
| Do you need a deposit |
Yes | No |
| Lowest average interest rates |
4%-4.5% | 5%-5.5% |
What’s the Difference Between an Auto Loan and a Personal Loan?
Although every loan is different, there are some key differences between an auto loan and a personal loan. These are critical for your decision about which type of loan to choose.
Flexibility
Personal loans are far more flexible than car loans. You can use a personal loan to buy a car, repair your home, or make any other large purchase. This means that if you have a few large expenses to cover in the same period, you can use one loan to finance all of them together. Because a personal loan is more flexible, it also gives you more choice when choosing which car to buy. You can use a personal loan to pay for changes or upgrades to your new car, like a new paint job, better speakers, or fancy upholstery.
In contrast, a car loan only covers buying a car. You usually won’t be able to use it to make changes to your new car, like changing the seat covers or upgrading the tires. Some car loans only cover new cars, or cars that are below a certain age. You might also be restricted to buying only certain types of car, or not be able to use a car loan for a 4x4 or a truck.
Credit Score
Your credit rating is far more important for a personal loan than for a car loan. Because most personal loans are unsecured, you need to have good or excellent credit in order to get favorable interest rates. If you have poor credit, you may not be able to qualify for a personal loan at all.
On the other hand, car loans are secured against the value of the car that you're buying. That means that your car acts as collateral, so your credit score is less important when applying for the loan. If you have poor credit, you could still be accepted for a car loan and get good interest rates.
How Long it Takes
If you need a car in a hurry, then the amount of time it takes to get the funds through is a big issue. Personal loans can take a while to process—up to a few weeks. In contrast, you’ll generally be offered financing and agree to the terms of a car loan on the spot in a car dealership. Car loans are far quicker and more convenient.
Repayment Terms
In general, personal loans have higher interest rates than car loans. This is because they are usually unsecured. Car loans use the car as collateral, so that helps to lower your interest rates, although it also means that you won't own the title to the car until you finish paying off the loan.
It’s worth noting that you could get a secured personal loan that uses your new car as collateral, but in that case, you won't find it very different from a dedicated car loan.
Most personal loans allow you to choose between fixed or variable rates. Variable repayments tend to allow you to pay off the loan early without any penalties. This makes it a particularly good choice if you expect that you'll be able to pay off the loan before the term ends. Car loans almost always have fixed interest rates, so you can predict what your payments will be each month. However, it also means you can't pay them off early.
If you get a car loan through a dealership, you might be able to access special offers like 0% interest rates and $0 deposits, so it’s worth doing some research to see what extras you can get.
Deposit
Most car loans require you to provide a deposit in order to qualify for the loan, which can be a problem if you don’t have much in your bank account. With a personal loan, you won’t need any down payment.
Personal Loans vs. Car Loans: The Pros and Cons
Now that we’ve reviewed what makes personal loans different to auto loans, we can compare the pros and cons of car loans vs. auto loans for buying a car.
Pros of Using a Personal Loan to Buy a Car
- You’ll have more flexibility to spend some of your loan to change the paint color or to spend the excess on a new sound system
- You can usually pay off a personal loan early without any prepayment penalties
- You won’t need a deposit
Cons of Using a Personal Loan to Buy a Car
- Interest rates are usually higher than an auto loan
- If you don’t have good credit, you won’t be eligible for a competitive loan
- Variable interest rates mean that you won’t be certain how much you’ll have to pay each month
- The application process usually takes longer than for an auto loan
Pros of Using an Auto Loan to Buy a Car
- Interest rates are usually lower
- You’ll be able to plan your monthly payments better because interest rates are generally fixed
- You can still qualify for good interest rates even if you have poor credit
- The application process is fast—you can usually get auto financing on the spot in a car dealership
- Car dealerships often have special offers such as 0% financing
Cons of Using an Auto Loan to Buy a Car
- It might not cover the type or age of car that you want to buy
- You won’t be able to use an auto loan for any other purposes, like repainting the car or upgrading the tires
- You won’t have ownership of the title to the car until you finish repaying the loan
- If you default on loan payments, you’ll lose your car
- You need a deposit
- You usually can’t pay off the loan early
Top Online Auto Loan Options
| LendingTree |
Vast network of loan providers with competitive rates
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| Auto Credit Express |
Helps borrowers with less than ideal credit
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| AutoLoanZoom |
APR from: Varies
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Which is Right for You: Personal Loan or Auto Loan?
In general, we recommend using a car loan to finance your new car. You’ll generally get lower interest rates, faster financing, and with some research, you could find excellent deals that mean you won’t need to pay a deposit. Because a new car depreciates in value so quickly, if you choose a personal loan, you’ll probably end up paying a lot more than its worth in interest payments. Additionally, a car loan is one option for customers with poor credit.
That said, there are some circumstances when a personal loan is a better choice. This includes if you can't get the money together for a down payment, if you want to make a lot of large purchases with a single loan amount, and/or you have an excellent credit score that allows you to unlock favorable rates.
