You can use either a personal loan or a specialized auto loan to buy a car. Which option is best varies, but auto loans tend to be less expensive and the qualification process is typically easier.
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Cars are a necessity for most Americans. Unless you live in a city with a robust public transit system, you likely need a car to get to work, go grocery shopping, or go out with friends. That said, in May 2019, the average new car cost $36,718, and few people can afford to pay more than $35,000 out of pocket to buy a car.
Most people need to borrow money to buy a new car. Many dealers offer loans, and banks offer specialized auto loans to help consumers purchase a vehicle. However, there are other options available to customers, such as personal loans.
Is it better to use an auto loan or a personal loan to buy a car? The answer is that it depends on your personal situation. Auto loans tend to offer lower interest rates than personal loans, and you might be able to take advantage of special deals like rebates when you get a loan from a dealer.
On the other hand, your car serves as collateral for an auto loan, putting it at risk of repossession if you can’t make loan payments. Unsecured personal loans don’t present the same risk for your car.
In this comparison:
- Personal loan vs. auto loan: What to consider
- Using an auto loan to buy a car
- Using a personal loan to buy a car
Personal loan vs. auto loan: What to consider
When you’re applying for any loan, you should be shopping around and comparing different factors to find the best deal. When choosing between an auto loan and a personal loan, consider the following variables.
- Interest rates: Auto loans tend to have lower interest rates than personal loans because your car serves as collateral for the loan. Personal loans, especially unsecured loans, typically charge higher interest rates, which means a higher monthly payment and a higher total cost for the car loan.
- Risk: With an auto loan, your car secures the money that you borrow. If you fail to make loan payments, the lender can repossess your car, making it difficult to continue earning an income. Personal loans still involve risk, but typically don’t require specific collateral that the lender could repossess.
- Fees: Both auto loans and personal loans charge fees, but the specific fees will depend upon the rules established by the lender. Look out for origination fees and early repayment fees with whatever loan you select.
- Loan terms: The longer the term of the car loan, the lower your monthly payment, but the more time you leave for interest to accrue. Personal loans typically max out at a five-year term, but some auto lenders offer longer loan terms.
- Down payment: When you get an auto loan, many lenders will want you to offer a down payment equal to a percentage of the car’s value. You’ll almost never see a personal loan that requires a down payment because personal loans don’t require collateral.
- Application process: The process of applying for a personal loan is often different from the process of applying for an auto loan. Personal loans are typically easier to get because lenders primarily look at your income, credit score, and credit history. To get an auto loan, you need to find a lender willing to offer a loan secured by the specific vehicle you purchase. This can be complex in some instances, such as if you choose to buy a used car.
Generally, when you take out a car loan, you want to choose the least expensive option. In the majority of cases, this will be an auto loan just because they have lower interest rates than personal loans. Still, if you feel you might worry about having difficulty making loan payments and the lender potentially repossessing your car, you should factor that into your decision.
Using an auto loan to buy a car
Auto loans are specifically designed for purchasing cars, which makes them a more straightforward option.
How it works
The first thing to consider when using an auto loan to buy a car is whether you want to work with a bank or get financing directly through the dealership. If you choose to get a loan from someone other than your dealer, you can apply directly with the lender. Meet with the lender to get a quote for an APR, loan term, down payment, and maximum loan amount. This will help you determine how much you can spend on your car.
Remember that you don’t have to take the full amount a lender is willing to give to you. Getting a smaller car loan means you’ll spend less on loan interest.
If you want to use dealer financing, you can go straight to the dealership and ask about financing while you shop. Even if you get financing from a bank or other lender, it can make sense to ask about dealer financing. Some dealers get kickbacks or benefits if you finance through them, so they might be willing to cut you a deal if they know you have a better offer than the one they initially made.
Pros & cons
- Lower interest rates
- You can get a loan directly from the dealer
- Longer terms are available
- Your car is at risk of being repossessed if you miss loan payments
- You are subject to lender requirements, which many mean restrictions when it comes to vehicle options
Where to find options
Many banks and credit unions offer auto loans to their customers, and there are even online lenders that specialize in car loans. You can also get financing directly through your car dealership.
Check out our guide to find the best auto loans.
Using a personal loan to buy a car
Personal loans are flexible loans that you can use for almost any purpose. They rarely require collateral, so the primary criteria that lenders look at when you apply are your income and your credit score and history.
How it works
To apply for a personal loan, you’ll need to fill out the lender’s application. Typically, you have to provide information about your financial situation and income, as well as how much money you’d like to borrow.
Personal loans can be harder to get than other types of loans. You’ll need good credit to qualify, and you might pay a higher interest rate if you have a bad credit score.
You’ll also probably want to apply for a loan before you purchase a car. This lets you get the money in your account and gives you the chance to make a cash offer, which may result in a discount.
Otherwise, personal loans work like other loans. You’ll get a monthly bill and have to make a minimum payment. You also might have to handle origination fees or early repayment fees, depending on terms.
>> Read More: How do personal loans work?
Pros & cons
- You don’t need to provide collateral
- You can potentially qualify for a cash discount
- Higher interest rates
- More stringent requirements to qualify
- More limited-term options
Where to find options
You can get personal loans from most banks and credit unions. There are also a variety of online lenders that specialize in personal lending, making it easy to find a company that will let you borrow money.
If you’re looking for a personal loan that you can use to buy a new car, or for any reason, our guide can help you easily compare the best personal loans.
Author: TJ Porter