Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Auto Loans Personal Loan vs. Auto Loan to Buy a Car: Which is Better? Updated Jul 02, 2024 6-min read Expert Approved Expert Approved This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Rebecca Lake, CEPF® Written by Rebecca Lake, CEPF® Expertise: Student loans, mortgages, home-buying, credit, debt, personal loans, education planning, insurance, investing, small business Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance. Learn more about Rebecca Lake, CEPF® Reviewed by Rand Millwood, CFP® Reviewed by Rand Millwood, CFP® Expertise: Financial planning, investments, education planning Rand Millwood, CFP®, CIMA®, AIF®, is a partner at Guardian Wealth Partners in Raleigh, North Carolina. His firm assists clients of all ages and areas of life (with a strong background in the medical and legal fields) in planning, investing, and preparing for retirement and other financial goals. Learn more about Rand Millwood, CFP® When you need to finance a vehicle purchase, it helps to know what options you have. An auto loan is an obvious choice, but you might consider a personal loan to buy a car instead. Personal loans are typically unsecured loans that allow you to borrow a lump sum and repay it over time with interest. Auto loans are secured by the vehicle you’re purchasing. We’ll compare the features of a personal loan vs. an auto loan to help you decide which financing option makes the most sense. Table of Contents Skip to Section Differences between a personal loan vs. auto loan Can you use a personal loan to buy a car? How do auto loans work to buy a car? Auto loan vs. personal loan: Which is right for you?Where to find the best auto or personal loans for your car purchase Differences between a 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 loanAuto loanRates6.98% – 35.99%*5.38% – 21.57%*Loan amounts$1,000 – $100,000$5,000 up to the manufacturer’s suggested retail price (MSRP)Repayment terms12 – 84 months1 – 85+ monthsDown paymentNone10% – 20% is often expected but not always requiredCollateralNot required for unsecured loans; secured personal loans require collateralYour vehicle is the collateralMinimum credit scoreTypically 620; some lenders accept borrowers with lower scoresTypically 600; some lenders accept borrowers with lower scores*In June 2024 Can you use a personal loan to buy a car? Personal loans offer flexibility because you can use the money for almost anything, including buying a car. Getting a personal loan for vehicle financing is worth considering if you qualify for better terms than you would with an auto loan or if you can’t get approval for a traditional vehicle loan. How do personal loans work for a car? Using a personal loan to buy a car is a straightforward process. Here’s what you can expect. Estimate your budget. First, you’ll need to know how much you plan to spend on a vehicle. When setting your budget, you can use a tool such as Kelley Blue Book to compare new and used vehicle prices. Compare rates. Personal loan rates vary by lender; the best rate is the lowest one you can qualify for based on your credit score. You might start your search by checking personal loan rates at your bank, then cast the net wider to include other lenders. Get preapproved. Personal loan preapproval means a lender has given you a conditional offer. Preapproval can give you an idea of how much you can borrow and the interest rate you’ll pay. Apply. You can submit a personal loan application once you find a lender you’d like to work with. Most lenders allow you to do this online, which takes just a few minutes. Get the loan funds and make your purchase. If you’re approved for a personal loan, wait for the money to be deposited into your bank account. Once the deposit clears, you can write a check or get an official check from your bank to cover the vehicle purchase amount. Repay the loan. You’ll need to make payments according to the lender’s schedule. Be aware of any penalty fees for paying your loan late or early. 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. 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 the same way you would a personal loan, according to the lender’s terms. Here’s how the process typically works. Set your budget. Just as you would with a personal loan, estimate your car-buying budget. A car loan calculator can give you an idea of what you might pay monthly based on different loan terms. Choose a financing option. You might get an auto loan from your current bank, a local credit union, an online lender, or a dealership. Comparing interest rates and loan terms for each option can help you decide which one aligns with your budget. Apply. Once you decide where to get auto financing, you can apply. Depending on the lender, approval might take a few minutes or days. Sign the paperwork. Once you’re approved for an auto loan, you’ll sign the paperwork and hand over your down payment. Repay the loan. You’ll make monthly payments to your lender until you’ve paid off the loan. You can check with your lender to see whether a rate discount is available for enrolling in automatic payments. Pros and cons of using an auto loan for a car Auto loans are designed to help you buy a car. As with personal loans, 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. That’s a plus if you plan to buy a more expensive vehicle. Down payment Some lenders offer $0 down payment 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. 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…ConsiderYou can’t or don’t want to put money down on a carA personal loanYou don’t want to risk repossession if you fall behind on paymentsA personal loanYou have excellent creditA car loan, if rates are lower than personal loansYou have extra cash to put toward a down paymentA car loan because 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. Our expert warns: Watch out for fees Rand Millwood CFP® Some banks have 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. 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. If you need help finding loan options, check out our research on the best personal loans and best auto loans.