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Personal Loan vs. Auto loan: Which is Best?

Last updated 03/15/2024 by

Randy Erickson

Edited by

Fact checked by

Although you can use either a personal or an auto loan to finance a vehicle purchase, each loan comes with its own pros and cons. An auto loan will likely have a better interest rate, but qualifying for one may be difficult if you are in the market for an older car. On the other hand, personal loans will provide more flexibility but often come with higher interest rates.
Planning on how to finance a new vehicle can be almost as, if not more, difficult than picking the vehicle itself. When planning to buy a new car, the most popular finance option is generally a typical auto loan. If you are in the market for an older used vehicle or a collectible car, you will likely need to consider using a personal loan if you want to finance the vehicle.
The two types of loans differ in some very key ways, so be sure to consider which is better based on your personal finance goals. Regardless of which type of loan best meets your needs, there are a variety of traditional and online lenders who might have a loan that’s right for you, even if you have bad credit.

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Auto loans

Getting an auto loan for a new car is generally the norm, but many used vehicles also qualify for traditional auto loans. The specific eligibility requirements will vary slightly depending on the lender.
There are a variety of auto lenders you can consider, such as credit unions, major banks, or other financial institutions. In most traditional auto loans, the car serves as collateral to ensure you continue to make monthly payments. Because of that added layer of protection to the lender, auto loans will often have a lower interest rate than a personal loan would.
Most lenders do place some limits on what car purchases will qualify for an auto loan, such as the vehicle’s mileage or age. However, most of the time, an auto loan is the right loan when it comes to buying a new car.

Pro Tip

Depending on your credit, you may even prequalify for a car loan at most financial institutions with just a soft credit check.

Why are auto loans usually secured loans?

A secured loan just means that the lender’s risk is minimized because the borrower has provided some form of collateral. In the case of most auto loans, the collateral is literally the car being purchased.
Though you may be concerned to hear your new purchase is used as collateral, this can actually be a smart financial move. With the additional collateral, auto loan lenders take less risk in loaning you money. This is why secured loans generally have lower interest rates than unsecured loans.

Not all cars qualify for auto loans

Although an auto loan is usually the first choice when you want to buy a car, not every vehicle will qualify for a loan. Many auto loan lenders limit the types of cars they are willing to finance.
For example, Bank of America, which offers auto loans in all 50 states, does not provide loans for any vehicle older than 10 years or any vehicle with a salvage or branded title. Although the exact restrictions may vary a bit depending on the financial institution doing the lending, generally speaking, many of the restrictions and limitations will be similar in nature.
If your car doesn’t fall within these restrictions and you want to get a better idea of the terms you may qualify for, check out the lenders listed below.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Personal loans

If you don’t think you can qualify for a traditional car loan, you may want to consider a personal loan to finance your car purchase. Personal loans can be used for pretty much anything, including weddings, vacations, and even debt consolidation. The borrower is the one responsible for using the funds for their intended purpose.
But there’s a catch. Personal loans generally provide less financial protection to the lender, so it is reasonable to expect a higher interest rate when comparing a personal loan to an auto loan.
Personal loans can be used to finance a car that may not qualify for a normal car loan. But without the extra security of collateral, lenders will weigh a potential borrower’s credit score and credit report much more heavily.

Pro Tip

Borrowers who qualify for a higher loan amount might want to use a personal loan to begin debt consolidation.

Most personal loans are unsecured

Personal loans are generally unsecured, meaning there is no collateral. Because of this, personal loans expose the lending institution to greater risk, resulting in interest rates that are usually higher than traditional car loans.

Not everyone will qualify for a personal loan

Because the primary factors in qualifying for a personal loan are your income and credit score, those with a poor credit score may not qualify for a loan with an acceptable interest rate. Since personal loans are unsecured, lenders will only provide the loan if they believe the potential borrower can afford the monthly payment based on their credit report.
To get an idea of what interest rates you may qualify for, use our comparison tool below. By typing your current credit score into the tool, you can determine whether now is the best time to get a personal loan. On the other hand, it might be more beneficial for you to first improve your credit score.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Personal loans might have better terms

For those that qualify and who would like a shorter loan term, unsecured personal loans might be ideal. While auto loans typically have loan terms of 36 to 72 months, personal loans will often have terms as little as 12 months.
If you just need a loan with a short term and have great credit, using a personal loan to buy a car might be the right call for you.

Personal loan vs. auto loan: Key differences

The best loan for you will depend on what you want to get out of the loan. For some, that might mean lower monthly payments. Other folks might want to save more money overall and make their final payment as soon as possible.
Take a look at the table below for a concise comparison of these two financing options to determine which method is right for you.
Personal loanAuto loan
Loan amount$1,000 to $50,000$500 to $100,000
Interest rate2.49% – 35.99%2.40% – 14.76% for new cars
3.71% – 20.99% for used cars
Loan term24 – 96 months24 – 84 months
Collateral?Usually noYes, by your car
Cosigner allowed?Often notYes
Restrictions on use?NoMust be for vehicle, may have limitations on age or mileage

Key Takeaways

  • An excellent credit score will qualify borrowers for more competitive personal and auto loans.
  • A traditional auto loan is a secured loan and is generally the preferable option when buying a new or used car.
  • However, depending on the age or condition of the car, you may not qualify for an auto loan. In that case, it might be necessary to consider personal loan offers.
  • Personal loans typically are unsecured, meaning the lender will take on more risk. This means personal loan interest rates are often higher than those of car loans.
  • Be sure to carefully consider which financing option is right for you before taking out either a personal or auto loan.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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