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Auto Loan vs. Personal Loan: Which Is Better?

It depends mostly on the car.

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By Jessica Walrack

Written by

Jessica Walrack

Writer

Jessica Walrack has over a decade of experience in personal finance. Her work has been featured by CBS News MoneyWatch, USA Today, U.S. News and World, Investopedia, and The Balance Money.

Edited by Jared Hughes

Written by

Jared Hughes

Editor

Jared Hughes has over eight years of experience in personal finance. He has provided insight to Fox Business, New York Post, and NewsBreak.

Reviewed by Meredith Mangan

Written by

Meredith Mangan

Senior Editor

Since 2011, Meredith Mangan has helped steer content creation in mortgages and loans, insurance, credit cards, and investing for major finance verticals, including Investopedia and The Balance.

Updated October 22, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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Credible takeaways

  • Older cars may not qualify for a traditional auto loan.
  • Auto loans often have lower APRs and more flexible eligibility requirements than personal loans. 
  • Personal loans don’t require a down payment.

Getting a new car can be exciting, but it can also be expensive. In January 2024, new cars cost an average of $47,401, according to Kelley Blue Book, compared to an average of $25,328 for used cars.

How you choose to finance your car purchase can have long-lasting financial implications, so it’s important to choose your car and car loan wisely. In most cases, you’ll want to use a traditional auto loan. But sometimes, you may not be able to. We’ll take a closer look at how these two loan types stack up and which is best to fund your new ride.

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How auto loans and personal loans compare

Here’s an overview of the key differences between the two. Average loan terms are from Experian’s 2023 report on the automotive finance market.

Personal loans
Auto loans
Average APR
12.33% for a two-year term
8.15% for a five-year term
Loan amounts
Generally up to $50,000, but some lenders offer loan amounts up to $200,000
Based on the MSRP of the vehicle plus costs like tax, license, and documentation and recording fees
Repayment terms
1 to 7 years with most lenders
62 to 72 months, on average
Loan type
Unsecured, generally
Secured
Down payment requirement
No
Typically 10% to 20%, but can vary

What is an auto loan?

An auto loan is a secured installment loan that’s used to finance a vehicle. Auto loans involve a lump sum that’s disbursed upfront, usually to the dealer, and repaid over a set term, with interest, through a series of installment payments. Unlike a personal loan, you can only use an auto loan to purchase a car, and you won’t get the funds directly.

The maximum loan amount is often based on the cost of a new car or the Kelley Blue Book value of a used car, plus taxes and other administrative fees. Auto loans tend to have lower APRs than personal loans, which makes them a better option than personal loans in most cases. However, they typically require a down payment of 10% to 20%.

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Important

Most lenders require vehicles be 10 years old or newer. They also may not finance a car that has high mileage, a salvage title, or is considered a project car. If you’re looking for such a vehicle, a traditional auto loan may not be an option.

What is a personal loan?

A personal loan is a type of installment loan that provides a lump sum upfront that you can use for a wide range of expenses — including buying a car. After you receive the funds, you’re required to repay the amount, plus interest, through a series of payments over a set term. In some cases, lenders also charge an upfront fee, an origination fee, which can be 1% to 12% of the loan. This is typically deducted from the funds before you receive them.

While personal loans tend to have lower annual percentage rates (APR) than credit cards, on average, they typically have higher rates than secured auto loans. The average APR for a 24-month personal loan was 12.33%, while the average APR for a 60-month auto loan was 8.22%, according to the Federal Reserve.

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Personal loans to buy a car

The following lenders allow the use of a personal loan to purchase a vehicle.

Advertiser Disclosure

All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms

Can you buy a car with a personal loan?

Since personal loans are usually unsecured, there is no appraisal or other valuation (like Kelley Blue Book) that’s required to get the loan. For this reason, they can be a good option for a car that doesn’t qualify for regular auto financing, like one that’s too old, has too many miles on it, or has a salvage title. They may also be a good choice if you want to buy a car to fix up, since a personal loan can provide the purchase price and then some for needed repairs or reconditioning.

You may have a harder time qualifying for a personal loan with fair or bad credit, however, since there’s typically no collateral as a safety net for the lender.

Check Out: How Do Personal Loans Work?

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Note

The APR more accurately represents the total cost of borrowing than the interest rate alone, as it also includes any upfront fees. You’ll want to consider the APR when looking at both personal loans and auto loans.

Secured loans vs. unsecured loans

Secured loans require the borrower to pledge an asset as collateral. For example, auto loans require you to pledge the car being financed. As a result, if a borrower defaults on a secured loan, the lender has direct recourse — it can seize and sell the asset to help recover its investment.

On the other hand, unsecured loans don’t require any collateral. If you qualify and are approved, you can borrow funds without putting any assets on the line. This also means unsecured loans typically have higher APRs, however, because the rate you get is based in part on your credit profile.

So, if a borrower uses a personal loan to buy a vehicle and defaults, the lender can’t seize the vehicle. The lender can, however, report the default to the credit bureaus, attempt to collect the debt, sell the debt to a collections agency, and/or sue the borrower.

Learn More: Secured vs. Unsecured Personal Loans

Auto loan vs. personal loan example

Let’s say you want to buy a $30,000 car with a loan and pay it back over five years. If you’re approved for both a personal loan and a traditional auto loan, consider how the costs stack up. The key difference between both loans is the APR and the down payment.

  • A 16% APR for a $30,000 personal loan would result in a $730 monthly payment, and $13,773 paid in interest. There are no down payments on personal loans.
  • A $27,000 auto loan (after a $3,000 down payment) with a 6% APR would have a $522 monthly payment and result in $4,319 in interest.

The personal loan costs more than the auto loan, even after you account for the required down payment.

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Note

If you don’t have cash on hand for the down payment, you could potentially use a credit card or personal loan to finance it. But not all car dealerships or lenders allow this.

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Advertiser Disclosure

All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms

How to get an auto loan

If you want to get an auto loan, there are a few places you can turn, including:

  • Indirect lenders: Indirect lenders are car dealers that arrange financing for you, often through their networks of lenders. You can usually find a local dealership in your area.
  • Direct lenders: Direct lenders are banks, credit unions, and alternative lenders that offer you direct financing for a car. LightStream, a Credible partner, is an example of a direct lender.
  • “Buy here, pay here” (BHPH) dealerships: BHPH dealerships offer in-house financing for the vehicles they sell. They often offer financing to people with poor or little credit who may be having trouble getting financing elsewhere.

A good place to start is to reach out to direct auto loan lenders and get quotes. Find out what loan amounts, rates, terms, and monthly payments are estimated to be available to you.

Then, if you’re interested in buying from a dealer, visit the dealership, find the car you want, negotiate the price, and see how the dealer’s financing compares to the quotes you’ve collected.

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Tip

When you walk into a dealership with your own financing, it can give you more leverage. You can negotiate the sale price as a cash buyer and aren’t reliant on them to tell you if you can afford the car or not.

How to get a personal loan

If you’re interested in going the personal loan route:

  1. Check your credit: Pull your credit reports to make sure that the information is up-to-date and accurate. If you find a mistake, file a dispute with the credit bureau to get it fixed. You can visit AnnualCreditReport.com for free credit reports.
  2. Collect quotes: Shop around and check if you prequalify with different lenders.
  3. Prequalify: You can prequalify without any impact to your credit, though formally applying for a loan may hurt it. Prequalification is not an offer of credit, and your final rate may differ from the estimate.
  4. Compare quotes: Once you collect a few quotes, compare the estimated loan amounts, APRs, terms, monthly payment amounts, and overall costs to find the best fit.
  5. Apply: Apply with the lender that seems like the best fit. Once you apply for the loan, the lender will conduct a hard credit inquiry, which can hurt your credit score temporarily. It may also require proof of your identity, income, and employment.
  6. Get your funds: If you’re approved, you can sign the loan contract and receive the funds. From there, you can shop for a car as a cash buyer. You can expect to receive the funds as soon as the same or next business day after approval with some lenders, but some may take up to a week.

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FAQ

Can you use an auto loan to buy a car from a private party?

Yes, it’s known as a private party auto loan. You can get them from banks, credit unions, and online lenders to help you buy a used car from a private seller. For example, LightStream offers private party auto loans from $5,000 to $100,000. With a private party auto loan, lenders may scrutinize the age, value and the vehicle title as part of the qualification process.

Why do auto loans usually have lower interest rates?

Auto loans tend to have lower rates than personal loans because the collateral requirement makes them less risky for lenders. If you default, the lender can seize and sell your vehicle to help recover its investment.

Can I get an auto loan with bad credit?

It is possible to get an auto loan with bad credit. A little over 15% of auto loans were taken out by borrowers with credit scores of 600 or less, according to Experian’s State of the Automotive Finance Market report for the third quarter of 2023. However, lenders typically still require some kind of down payment even if you have bad credit, usually 10% or $1,000, whichever is higher.

Do I need a down payment to buy a car with a personal loan?

Personal loan lenders don’t require down payments. However, they may charge origination fees that reduce the loan amount you receive.

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Meet the expert:
Jessica Walrack

Jessica Walrack has over a decade of experience in personal finance. Her work has been featured by CBS News MoneyWatch, USA Today, U.S. News and World, Investopedia, and The Balance Money.