Personal Loan vs. Auto Loan: Which Is Better?

Written By
I. Mitic
July 08,2023

When it comes to borrowing money to finance a car, there is a range of options to choose from. Two of the most popular types are personal loans and auto loans. As both have their pros and cons, it can be difficult to decide which one is right for you. In this article, we’ll discuss the advantages and disadvantages of a personal loan vs. an auto loan so that you can make an informed decision about which loan you should select.

What Is a Personal Loan?

A personal loan is a credit that can be used for various purposes. The borrower does not have to specify what the loan will be used for, making it a good option if you need money for an emergency purchase or unexpected expense. Personal loans are available from banks, credit unions, and online lenders. They typically have terms of three to five years and a fixed interest rate, making them suitable for those who need a loan for a specific purpose and can afford regular payments.

What Is an Auto Loan?

An auto loan is a loan that is specifically used for the purchase of a vehicle. Borrowers can use a personal loan to pay for a new vehicle, but they can also use it for various other purposes. On the other hand, in the case of auto loans, borrowers must use them to purchase a car, truck, or motorcycle. 

Auto loans are usually issued by banks, online lenders, and credit unions. They generally cover periods of three to seven years and have a fixed or variable interest rate. Another thing you should know about auto loans is that they often come with pre-completion penalties, which means that if you pay off the loan early, you may have to pay a fee.

Pros and Cons of Using Personal and Auto Loans

Now that we know what personal loans and auto loans are and how they work, let's look at the pros and cons of each.

Advantages of Using a Personal Loan to Buy a Car

A personal loan can be a great way to finance the purchase of a new car. Unlike an auto loan, a personal loan does not require collateral, so you can get the money you need without putting your car at risk. Personal loans also tend to be easier to qualify for than auto loans, so if you have bad credit, a personal loan may be a good option.

In addition, personal loans can be used for any purpose, for instance, covering other expenses associated with buying a car, such as insurance or repairs. These are just some of the benefits of using a personal loan to buy a car. If you're looking for a flexible and affordable way to finance your next car purchase, a personal loan may be the perfect solution.

Why Use an Auto Loan Instead of a Personal Loan

There are a few key reasons you might want to consider using an auto loan instead of a personal loan to purchase your next car. 

  • First, auto loans tend to have lower interest rates than personal loans. This means that you'll save money on interest over the life of the loan. 
  • Additionally, auto loans can be easier to qualify for than personal loans. The reason is that lenders view cars as collateral for the loan, making them less risky. As a result, you're more likely to be approved for an auto loan than a personal loan. 
  • Finally, auto loans often come with perks like 0% APR financing or cash back rebates, which is why using a personal loan to finance a car might not always be the best choice.
  • These perks can save you thousands of dollars on your car purchase. Therefore, it makes sense to consider an auto loan when financing your next car.

The Cons of Using a Personal Loan to Purchase a Car

The main reason people take out personal loans is to consolidate debt or make a large purchase, like a car. However, there are a few things you should keep in mind before taking a personal loan to finance a car. 

  • First of all, personal loans typically have higher interest rates than auto loans, so you’ll end up paying more in interest over the life of the loan. 
  • Another thing you should know is that most personal loans have shorter terms than auto loans, so you’ll be making higher monthly payments. 
  • Lastly, if you fall behind on your payments, you could risk damaging your credit score or even losing the car. So while there are some potential advantages of using a personal loan to purchase a car, there are also serious risks that you should be aware of.

Disadvantages of Auto Loans

Auto loans can be a great way to finance the purchase of a new vehicle. However, there are also potential drawbacks to obtaining an auto loan that consumers should be informed about. One of the main disadvantages of auto loans is that they often come with high interest rates. This can make it difficult to keep up with payments and ultimately lead to a higher total cost for the vehicle. 

In most cases, auto loans require a sizable down payment, which can strain your financial resources at the outset. Lastly, if a vehicle is totaled or stolen, the lender may still require the borrower to pay off the full loan amount, even though the car is no longer in the borrower's possession. For these reasons, it's important to consider the possible drawbacks before taking out an auto loan instead of financing a car with a personal loan.

Additional Considerations

There are a few things you should take into account before applying for a car loan. First and foremost, you'll want to be sure you can afford the monthly payments. Not only will you need to make the loan payments, but you'll also have to cover the cost of gas, insurance, and maintenance. 

You should also consider the length of the loan. Longer loans will have lower monthly payments, even though you'll end up paying more in interest over time. On the other hand, shorter loans will have higher monthly payments but will enable you to save money on interest. Ultimately, choosing between personal loans vs. auto loans mainly depends on your needs and preferences. The best loan for you will be the one that fits your requirements but won’t overburden your budget.

Finally, be sure to shop around for the best interest rate, as it will significantly impact the total amount you'll pay for your car. With all of these aspects to consider, it's important to be diligent and do your homework before obtaining a loan to purchase an automobile. You can also consult with a financial advisor to get expert advice on which loan option is best for your situation. They can help you weigh the pros and cons of each option and select the one that is in line with your needs and finances.

Personal vs. Auto Loans: In Conclusion

Both personal and auto loans have their own pros and cons. Before getting a personal loan to buy a car or going for an auto loan instead, be sure to consider all of the factors involved. This will help you make the optimal decision for your financial situation and ensure you get the best deal possible.

Another thing that can help you get the cheapest deal is to have a clear idea of what you want before you start shopping around. This way, you can be sure to compare different lenders and secure the loan that best fits your needs but won’t break your bank.


Is personal loan interest higher than car loan interest?


Personal loans typically have higher interest rates than auto loans. However, the interest rate will vary depending on the lender. If you’re thinking about auto loans vs. personal loans, you might want to compare offers from various lenders to see which one has a more favorable interest rate.

Does it hurt my credit score to pay off a loan early?


Paying off a loan early will not hurt your credit score. In fact, it can actually help improve your credit score by showing that you're able to make timely payments on a loan. However, if you use a personal loan to finance a new car and it comes with a prepayment penalty, you may want to think about whether paying off the loan early is worth the cost.

Is 699 a good credit score?


A credit score of 699 is considered good and will likely get you approved for a loan. However, you may be able to secure a better interest rate if your score is higher. You can improve it by paying your bills on time, using credit sparingly, and maintaining a good credit history. 

If you have this score and wish to purchase a new car but you're not sure how to choose between a personal loan vs. an auto loan, you should compare offers from several lenders to determine which one has a better interest rate.

What is the lowest credit score to buy a car?


Typically, the lowest credit score to buy a car is around 620. However, it can vary depending on the type of car you are looking to purchase and the lender you have chosen to work with. Some lenders may require a higher credit score for certain types of cars, so it’s always best to check with your lender before deciding. Additionally, some dealerships may have their minimum credit score requirements, so it’s always advisable to inquire with the dealership as well. 

The best way to find out what credit score you need to buy a car is to let lenders or dealers know what your needs and capabilities are. In turn, they will provide specific information about their requirements and conditions, which you can compare and then opt for one provider. 

About author

For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.

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