Personal Loan Vs. Auto Loan: Key Differences

Loan Type

Personal loans are generally unsecured loans, meaning your credit score and income determine whether you qualify. Though some lenders offer secured personal loans, they aren’t as common. Unsecured personal loans generally have higher interest rates. That said, if you default on a personal loan, it’s less likely to result in your car being repossessed.

Auto loans are secured loans, which means your car acts as collateral for the loan. Though this may mean lower interest rates, there is a higher risk of car repossession if you miss payments and default on your loan. While a lender may seize your car if you default on a personal loan, it would have to go through the court system first.

Interest Rates

Although interest rates vary for both loans, car loans are secured loans, which means they’ll generally have lower interest rates. On the other hand, personal loans generally have higher rates. That means the rate you qualify for can vary based on your credit score, debt-to-income ratio (DTI) and annual income.

Even though auto loan rates are generally lower, the rate you receive will depend on a few factors. Your credit score will influence the rate you qualify for, so you can still save money if you have good to excellent credit. Your loan-to-value ratio (LTV), which can also help you save money, is the total dollar amount of your loan divided by the actual cash value of your car. Several factors can influence your LTV ratio, including your down payment.

Car Type

Auto financing limits the type of car you can buy. New cars and used cars less than 10 years old are usually financed at a dealership or directly through a credit union, bank or other financial institution.

Personal loans, on the other hand, are much more flexible around the type of car you buy because you can use the cash from a personal loan for almost anything. With a personal loan, you can purchase any car type you like. The loan can simplify buying a car directly from an individual or even help you buy a vintage car at an auction. Personal loans can also be simpler to secure, and you can qualify for one online.

Down Payment

You’ll likely need to make a down payment with a car loan. Some dealers may require zero down on new or used cars, but it may result in a higher interest rate. Though down payments are often flexible, you’ll usually get a better interest rate if you put down 20% of the car’s cost at signing.

Personal loans don’t require any down payment. You apply for the loan and receive a single lump-sum payment from your lender. However, your lender may require an origination fee, which helps cover the administrative costs of creating your loan.

Loan Length

For both personal loans and car loans, repayment term lengths are often extremely flexible and depend on the lender and your needs. While longer car loans have grown in popularity in recent years, the most common loan lengths are 60 or 72 months. Some car loans can even last as long as 96 months.

Like car loans, personal loans are highly customizable to your needs. For most borrowers, loan terms that last 2 – 7 years are typical, though many lenders offer longer-term loans. Keep in mind that the length of your loan affects the overall amount of interest you pay. A longer loan means more money spent on interest over time.