Personal Loan vs. Auto Loan: What’s the Difference?
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Personal loans can pay for just about anything, while auto loans are used specifically to finance a new or used car purchase. Because personal loans are unsecured, they usually have higher rates than auto loans, which are secured by your vehicle.
Personal loans are best for large, one-time expenses like debt consolidation or home improvement projects. You can use a personal loan to finance a new or used car, but an auto loan is likely the cheaper option.
Personal loan vs. auto loan
Typical loan amount
Typical APR range
Typical repayment term
Can be, but unsecured is more common.
Yes, by your vehicle.
May be required.
Is a personal loan better than an auto loan?
For most borrowers, a personal loan is not better than an auto loan because auto loans are the cheapest way to finance a new or used car.
For example, let’s say you have fair credit (a 630 credit score or higher) and are able to get an 8% annual percentage rate (APR) on a $20,000 auto loan with a repayment term of five years. The same amount and repayment term could come with a 20% APR on a personal loan, because the funds are unsecured.
For the auto loan, your monthly payment would be about $406 and you’d pay a total of $4,332 in interest. For the personal loan, your monthly payment would be about $530 and you’d pay a total of $11,793 in interest.
One exception to choosing an auto loan over a personal loan would be if you don't want to make a down payment on the vehicle and would accept a higher rate in exchange for unsecured funds. Though some lenders and dealerships may offer auto loans without a down payment, you’ll get a lower rate on your auto loan if you make one.
» MORE: Best unsecured personal loans
Also, unlike with auto loans, a personal loan lender won’t place a lien on your car when you get a personal loan, so you’ll have your title in case you want to sell before you’ve paid off the car.
However, because of the lower interest rates, an auto loan is still the smartest choice for most car shoppers.
Personal loan vs. auto loan rates
Annual percentage rates on personal loans are typically higher than auto loan rates because the lender takes on more risk by letting you borrow without the leverage of your vehicle.
With an auto loan, the type of vehicle you buy also affects your rate: Loans for used cars often have higher APRs than those for new cars.
With both types of loans, your credit profile, income and existing debts influence the rate you receive. Borrowers with good to excellent credit (690 credit score or higher), steady income and little existing debt qualify for the lowest rates.
Personal loan vs. auto loan terms
Repayment terms on personal loans and auto loans depend on the lender, but both types of loans generally come with repayment options ranging from two to seven years.
Longer repayment terms mean you’ll pay more in interest over the lifetime of the loan. For auto loans, NerdWallet recommends keeping your repayment term at 60 months or lower for a new car and 36 months or lower for a used car.
Getting a personal loan vs. an auto loan
The steps for getting personal and auto loans are similar and involve the following:
Check your credit: 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. Knowing your credit score will help you ballpark the rate you may qualify for.
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 see what rate and loan amount a lender can offer you without impacting your credit score. You can pre-qualify with NerdWallet to see rates from multiple online lenders. 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.
Finalize your offer: Read your personal or auto loan contract carefully before accepting the offer to be sure you understand the terms.