Personal Loan vs. Auto Loan: What’s the Difference?

Personal loans and auto loans are two of the most common financing options available for borrowers. But what is the key difference between the two?

Well, a personal loan can be used to cover any general expenses. Whereas an auto loan is specifically designed to finance a new or used vehicle. What’s more, personal loans are unsecured loans and require no collateral. An auto loan, on the other hand, is a secured loan that requires collateral to lower the risk for the lender.

Read on to learn more about all of the differences in our comprehensive personal loan vs. auto loan comparison guide.

Personal Loan vs. Auto Loan: The Differences Explained

	Personal Loans	Auto Loans
Loan Amount	$100 to $100,000	$5,000 to $100,000
Repayment Term	2 to 7 years	2 to 8 years
APR	6% – 36%	5% –
Secured	No	Yes

What Are Personal Loans?

Personal loans are unsecured loans offered by lenders in the form of a lump sum payment. You can use a personal loan for any expense, including a house or car repair, an emergency medical bill, tuition, debt consolidation, or even a vacation. 

What’s more, you can also get a flexible payment structure, depending on your needs and situation. The higher the repayment period, the lower your monthly payments. You can calculate your monthly payments using an online loan calculator by entering the APR and loan term. 

Since personal loans are unsecured, they aren’t backed by collateral. Therefore, they come with a higher annual percentage rate (APR) than other loans. The APR is determined by your credit score. 

Personal loans also come with stricter eligibility criteria as they are more risky for the lenders. Borrowers with a poor credit score may not qualify.

What Are Auto Loans?

An auto loan is a secured loan that sets your vehicle as collateral. When you get an auto loan, the lender will disburse the entire payment to the vehicle’s seller or dealership. It is solely meant for purchasing vehicles and cannot be used for any other purpose.

An auto loan comes with fixed monthly payments. However, the interest rates and repayment terms differ. Since auto loans are secured, you will get a lower interest rate than a personal loan. The loan terms are generally up to 5 years. 

The title to the vehicle remains with the lender as long as the final repayment has been done. If you default on your auto loan, your vehicle can be seized by the lender to pay for the losses. 

Auto loans are usually easier to acquire as they are secured. You can even qualify if you have a below-average credit score. 

Personal Loan vs. Car Loan: Which Is Better?

Whether you should get a personal loan or a car loan totally depends on your needs. Auto loans are ideal for you if you want to finance a new or used car. They come with lower interest rates and fairly easier eligibility criteria. 

But if you are looking for a loan to cover other expenses, you can use a personal loan. A personal loan can also be used instead of an auto loan if you don’t want to make a down payment on the vehicle. You should also opt for a personal loan instead of an auto loan if you don’t want to declare your vehicle as collateral. 

However, do note that personal loans come with higher interest rates. For instance, if you have a credit score of 630 or higher, you can get an auto loan with a 10% APR. For the same credit score, the APR you will get on a personal loan will be 20%.

Frequently Asked Questions (FAQs)

Can a Personal Loan Be Used for Auto Purchase?

Yes. You can use a personal loan to make any purchases, including a vehicle. However, it is recommended to use an auto loan for purchasing a car as auto loans are specifically designed for this purpose and have lower interest rates and longer repayment terms. 

What Should You Not Choose a Personal Loan to Purchase?

You should not use a personal loan to purchase depreciating assets like luxury items, electronics, or furniture. You should also avoid using personal loans for shady investments like cryptocurrencies, or for vacations. 

Will a Personal Loan Affect Getting a Car Loan?

Having a personal loan can have an effect on your ability to get a car loan. This is because a personal loan increases your debt-to-income (DTI) ratio. Since lenders look at your DTI ratio when reviewing your loan applications, it has an impact on their final decision.

Can I Use a Personal Loan for Car Repair?

Yes, a personal loan can be used for car repairs. It is especially ideal for unexpected repairs when you don’t have enough savings to pay for costly repairs.

Is An Auto Loan a Personal Loan?

No. An auto loan is not a personal loan. It is a type of secured loan that uses the vehicle intended to purchase as collateral. On the other hand, a personal loan is a type of unsecured loan that does not require any collateral.

Can You Use a Personal Loan to Buy a Car?

While you can use a personal loan to buy a car, it is not usually recommended as personal loans have higher interest rates. You can use an auto loan to buy a car as it comes with a lower interest rate.

Bottom Line

Choosing the right loan for you is an incredibly important decision that can impact your financial situation. Therefore, it is important to make the right choice. We hope this personal loan vs. auto loan guide helps you make the right choice for you. Make sure to shop around for the loan to get the best deal possible. 

Good luck!