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 usually unsecured, they often have higher rates than auto loans, which are secured by your vehicle.
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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
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. |
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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 typically 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 a 10% annual percentage rate (APR) on a $20,000 auto loan with a repayment term of five years and no down payment. 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 $425 and you’d pay a total of $5,496 in interest. For the personal loan, your monthly payment would be about $530 and you’d pay a total of $11,793 in interest.
Reasons to use a personal loan instead of an auto loan
One reason to choose a personal loan over an auto loan is if 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.
Another reason could be if you would rather accept a higher rate to avoid using your car as collateral.
» MORE: Best unsecured personal loans
Also, auto loan lenders usually require full insurance coverage on your financed vehicle, which you can opt out of if you buy the car using a personal loan. 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.
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.
Steps to get a personal loan or 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 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.
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