Personal Loan vs. Auto Loan: What’s the Difference?

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Personal loan vs. auto loan
Personal loans | Auto loans | |
---|---|---|
Typical loan amount | $1,000-$100,000. | $5,000-$100,000. |
Typical APR range | 6%-36%. | 5%-28%. |
Typical repayment term | 2-7 years. | 2-7 years. |
Secured | Can be, but unsecured is more common. | Yes, by your vehicle. |
Down payment | No. | May be required. |
Where to get | Banks, credit unions, online lenders. | Banks, credit unions, online lenders, auto dealerships. |
Get started |
Is a personal loan better than an auto loan?
When to get a personal loan instead of an auto loan
- You don't want to make a down payment on the vehicle, which is a requirement for some auto lenders and dealerships. Personal loans don’t require a down payment, but you may need strong credit and income to qualify for a loan large enough to pay for the vehicle.
- You would rather accept a higher rate to avoid using your car as collateral. Since an auto loan is secured by your vehicle, the lender has a lien on it until you pay off the loan. That means they can take your car if you don’t make payments. It could also make it difficult to sell the car if you haven’t paid off the loan.
- You don’t want to purchase full coverage for your vehicle. Auto loan lenders usually require full insurance coverage — which is usually defined as state-mandated liability insurance plus comprehensive and collision coverage — on your financed vehicle. You can opt out of this requirement if you buy the car using a personal loan.
- You’re purchasing an older or high-mileage vehicle. If you’re trying to buy a car that is over 10 years old or has more than 100,000 miles, it might be difficult to get an auto loan, because lenders tend to have restrictions on the age and mileage of a financed vehicle.
- You’re buying a car from a private party. Though it’s possible to get a private-party auto loan, not all banks offer them. Also, the APRs are usually higher than traditional auto loans.
Personal loan vs. auto loan rates and terms
Personal loan pros and cons
Pros
Can be used for almost anything.
Don’t require a down payment.
Usually aren’t secured by collateral.
Cons
Higher APRs than auto loans.
May have additional costs, like origination fees.
May require a good credit score.
Auto loan pros and cons
Pros
Lower APRs than personal loans.
Often easier to qualify for.
Some dealers offer special financing terms, like rebates or a low APR.
Cons
Your lender has a lien against your vehicle.
Often requires a down payment.
Usually requires you to maintain comprehensive and collision insurance.
May be difficult to qualify for if you’re financing an older or high-mileage vehicle.
Steps to get a personal loan or an auto loan
- Check your credit: Knowing your credit score will help you ballpark the rate you may qualify for. Review your credit score and your credit reports for any errors before applying. You can get your credit score for free on NerdWallet or at AnnualCreditReport.com.
- Compare lenders: Before moving forward with a personal loan or auto loan, compare rates, terms and loan features. Calculate monthly payments using a personal loan calculator or an auto loan calculator to determine what you can afford.
- Pre-qualify or get preapproved: Pre-qualifying for a personal loan will let you preview the rate and loan amount you could get without impacting your credit score. Pre-qualification is available through some auto lenders as well. Others offer preapproval, which requires a hard credit pull, but it could result in a rate that’s closer to your final offer.
- Formally apply and finalize your offer: Read your personal or auto loan contract carefully before accepting the offer to be sure you understand the terms.
Article sources
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