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Auto loans are used specifically to finance a new or used car purchase, while you can use personal loans to pay for just about anything.
Though you may use a personal loan to finance a new or used car, an auto loan is likely the cheaper option.
Personal loan vs. auto loan
| Personal loans | Auto loans | |
|---|---|---|
| Typical loan amount | $1,000-$100,000. | $5,000-$100,000. |
| Typical APR range | 7%-36%. | 4%-30%. |
| 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. |
| Ownership | You own the car outright. | The auto lender has a lien on your vehicle until the loan is paid off. |
| Where to get | Banks, credit unions, online lenders. | Banks, credit unions, online lenders, auto dealerships. |
| Get started |
Rates for personal loans vs. auto loans
With both types of loans, your credit profile, income and existing debts influence the annual percentage rate (APR) you receive. Borrowers with good to excellent credit (scores in the mid-600s or higher), adequate income and little existing debt qualify for the lowest rates.
Personal loans are usually unsecured, so rates are typically higher than auto loan rates. If you use a personal loan to pay for a car and stop making loan payments, the lender can’t take your vehicle. That makes this option a higher risk for lenders. They often charge higher rates for personal loans to account for that higher risk.
Auto loan rates are typically lower than personal loan rates, because auto loans are secured by your vehicle and bring less risk to the lender. If you stop making payments on an auto loan, the lender can repossess your car to recoup its losses.
🤓 Nerdy Tip
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. When to get an auto loan instead of a personal loan
An auto loan is the more affordable way to pay for a car in most cases. Compared to personal loans, auto loans tend to be cheaper and easier to qualify for because they’re secured by your vehicle. If you don’t make payments, the lender can repossess your car to recoup what you owe.
For example, let’s say you have good credit (a score in the mid-600s to the mid-700s) and are able to get a 7% APR on a $25,000 auto loan with a repayment term of five years and no down payment.
Your monthly payment would be about $495. You’d pay a total of $4,702 in interest.
The same amount and repayment term could come with a 15% APR on a personal loan, because the loan is unsecured.
A $25,000 personal loan with a 15% APR and a five-year repayment term would mean monthly payments of about $595, and you’d pay a total of $10,685 in interest.
When to get a personal loan instead of an auto loan
While an auto loan is typically the best choice for most a car purchase, there are a few reasons you might choose a personal loan instead, such as:
- 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.
- You don’t want to purchase full coverage for your vehicle. Auto loan lenders typically 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 getting full coverage 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. 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 lenders offer them. Also, the APRs are usually higher than traditional auto loans.
» MORE: Best unsecured personal loans
Pros and cons of choosing an auto loan over a personal loan
Pros
Lower APRs than personal loans.
Often easier to qualify for.
Getting a loan at the dealership when car shopping is convenient.
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 restricted to purchasing vehicles from dealerships that are within certain age and mileage limits.
Steps to finance a vehicle purchase
The steps for getting personal and auto loans are similar and involve the following:
- Check your credit: Lenders will use your credit score to determine if you qualify and at what rate. 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. Estimate monthly payments using a personal loan calculator or an auto loan calculator, and 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. Other auto lenders offer preapproval, which requires a hard credit pull, but it could result in a rate that’s closer to your final offer. A hard credit pull can cause your credit score to drop slightly.
- Formally apply and finalize your offer: The lender will likely conduct a hard credit pull when you formally apply, if it did not do so earlier. Read your loan contract carefully before signing to be sure you understand the terms.
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