Personal Loan vs. Auto Loan to Buy a Car: Which Is Better?

When financing a car, you can choose between a personal loan or an auto loan. Auto loans are secured by the vehicle, often with lower rates, while personal loans are unsecured and offer more flexibility.

In this guide, we’ll compare both options to help you decide which one fits your needs.

Personal loan vs. auto loan 

Personal loans and auto loans can help you buy a new or used vehicle. Both are available from traditional banks, credit unions, and online lenders. Auto dealerships may also offer in-house financing.

Here’s how personal loans and auto loans compare at a glance. 

	Personal loan	Auto loan
Rates	6.98% – 35.99%*	5.34% – 21.55%*
Loan amounts	$1,000 – $100,000	$5,000 up to the manufacturer’s suggested retail price (MSRP)
Repayment terms	12 – 84 months	1 – 85+ months
Down payment	None	10% – 20% is often expected but not always required
Collateral	Not required for unsecured loans; secured personal loans require collateral	Your vehicle is the collateral
Minimum credit score	Typically 620; some lenders accept borrowers with lower scores	Typically 600; some lenders accept borrowers with lower scores

How do auto loans work to buy a car? 

Auto loans let you buy the vehicle of your choice, using the car as collateral for financing. You’ll repay the loan according to the lender’s terms. 

Here’s how the process works.

Pros and cons of using an auto loan for a car

Auto loans are designed to help you buy a car, but they have advantages and drawbacks. 

Pros

• Low rates

  Car loans may offer lower rates because the vehicle serves as collateral. Some dealerships also offer promotional financing as low as 0% APR for a certain period.

• High loan limits

  You might qualify for a higher financing amount than you would with a personal loan, which can help if you plan to buy a more expensive vehicle.

• Down payment

  Some lenders offer promotions that let you buy a vehicle with no money down. However, 100% financing could raise your rate and make your payments more expensive.

• Easier approval

  Getting approved for an auto loan can be easier because the secured nature of the loan gives a lender collateral.

Cons

• Vehicle loss

  If you fail to make the payments on an auto loan, your lender could repossess the vehicle.

• Depreciation

  Vehicles are depreciating assets, so consider whether you’re comfortable taking out a long-term loan for a car that may lose most of its value before you pay it off.

Can you use a personal loan to buy a car? 

Yes: Personal loans offer flexibility because you can use the money for almost anything, including buying a car. It could be worth considering if you qualify for better terms than with an auto loan or if you can’t get approval for a traditional vehicle loan. 

How do personal loans work for a car?

Here are the steps to get a personal loan to buy a car.

Pros and cons of using a personal loan for a car

Using a personal loan versus an auto loan to buy a car has advantages and disadvantages. 

Pros

• No down payment

  Personal loans don’t require a down payment like car loans, so you won’t pay anything upfront. 

• No collateral

  If you’re using an unsecured personal loan to buy a car, you won’t need to give the lender collateral. 

• Fast funding

  Some lenders may deposit loan funds into your bank account as soon as the same day you’re approved or the next business day. 

Cons

• Higher rates

  Personal loans may charge higher rates than auto loans since there’s no collateral to back them up.

• Higher payments

  A higher rate can translate to a higher monthly payment, which could strain your budget.

• More difficult approval

  Getting approved for a personal loan may be more difficult if you have fair or poor credit because you don’t have collateral. Approval can be easier for an auto loan, especially through a dealer, because it can repossess the vehicle if you don’t make payments.

Auto loan vs. personal loan: Which is right for you?

Auto loans and personal loans can help you get on the road, but only one might be best for your situation. Looking at your finances and needs can help you decide which route to take. 

If…	Consider
You can’t or don’t want to put money down on a car	Personal loan
You don’t want to risk repossession if you fall behind on payments	Personal loan
You have excellent credit	Auto loan (assuming rates are lower than personal loans)
You have extra cash to put toward a down payment	Auto loan (you could qualify for lower rates with a larger down payment)

Go back to your budget and consider how much you can afford to pay monthly and how much interest you’re comfortable paying overall. It’s also helpful to check your credit beforehand to get a sense of what rates you might qualify for. 

Some banks charge underlying fees associated with processing, the amount of the loan, or based on the timing of when you use the loan funds.

Auto loan fees tend to be laid out clearly on the paperwork you sign to purchase and finance the vehicle.

The key with either loan is to spend time looking through the paperwork to understand the fees you’re paying and why. In some cases, especially with auto loans, if you push back on certain fees, such as admin fees, you can get them reduced or waived. So just be aware of what is included, ask questions if you don’t understand something, and see whether there’s flexibility in the amount or the ability to waive certain fees.

Rand Millwood, CFP®

Where to find the best auto or personal loans for your car purchase 

Whether you choose a personal or auto loan to buy a car, take time to shop around. Estimate your payments with different loan terms, and check rates with multiple lenders. If you’re getting rate quotes, look for lenders that don’t require a hard credit check.

Best auto loans

Best personal loans

For more information, check out our research on the best personal loans and best auto loans.