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Published November 14, 2022
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Personal Loan vs. Car Loan: What’s the Difference?

Personal loans give you a lump sum for large purchases. Credit cards work better for smaller, everyday expenses.

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Personal loans can pay for just about anything, while car loans, or auto loans, are used specifically to finance a new or used car purchase. Because personal loans are unsecured, they usually have higher rates than car loans. That’s because your vehicle acts as collateral.

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 your cheapest option.

» MORE: What is a loan?

Compare personal loans vs. auto loans for financing a car

Personal loansCar loans
Typical loan amount$4,000 - $50,000.$4,000 - $100,000.
Typical APR range5% - 30%6% - 24%
Typical repayment term1 - 7 years.1 - 7 years.
SecuredCan be, but unsecured is more common.Yes, by the vehicle.
Down paymentNo.May be required.

When car loans are best: Auto loans are the cheapest way for most people to finance a new or used vehicle. Some lenders and dealerships may offer financing without a deposit, but you’ll get a lower rate on your loan if you make one. Plus, your minimum repayments will be smaller to match.

You can refinance your auto loan to get a lower rate if you’ve made on-time payments toward your auto loan for a year or longer and your credit has improved.

When personal loans are best: Personal loans work best for borrowers who don’t want to put down a deposit on the vehicle and would accept a higher rate in exchange for unsecured funds.

Unlike with an auto loan, a 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.

Rates

Annual interest 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 interest rates 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 and steady income tend to qualify for the lowest rates.

Terms

Repayment terms on personal loans and auto loans depend on the lender. Some lenders offer one to seven years on a personal loan, others offer only three- to five-year terms. Car loans can have terms of up to seven years, but terms between two and five years are common.

In both cases, 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.

Getting a personal loan vs. an auto loan

The steps for getting personal and auto loans are similar and involve the following steps:

  • Check your credit. Review your credit score and your credit reports for any errors before applying. Knowing your credit score will help you ballpark the rate you may qualify for.
  • Compare lenders. Before moving forward with an auto loan or personal loan, compare rates, terms and loan features. Calculate monthly payments on a personal loan or auto loan to determine what you can afford.
  • Pre-qualify. If possible, 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
  • Finalise your offer. Read your personal or auto loan contract carefully before accepting the offer to be sure you understand the terms.

» MORE: Personal loan vs. credit card

If you’re in the United States, read this article on the NerdWallet US site.

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