Personal Loans vs Car Loans

Is it easier to get a car loan or personal loan?

In general, it may be easier to get a car loan than a personal loan. Here is why. When you are applying for a car loan, you are applying for a secured line of credit to pay for the purchase of your new vehicle. The loan is secured by the vehicle that you are purchasing. This means that the bank or lender is putting a lien on your car until it is paid in full. You do not actually own the car until the bank removes that lien after your last car payment. If for any reason you start to miss payments and eventually default on the car loan, the bank then can seize your vehicle and sell it to recoup their losses.
Since the bank actually owns the vehicle while you are making payments, the loan is seen as less risky than an unsecured personal loan that is not backed by any type of collateral whatsoever. When you take out an unsecured personal loan, you are simply using your credit history and income to convince the bank that you are trustworthy and that you will fulfill your financial obligations.
Although the bank cannot seize the vehicle if you should happen to default, there can be devastating negative effects that occur to your credit report. It is estimated that a default on a personal loan can come with a 90 to 110-point drop to the average consumer's credit score. The higher your credit score, the more impactful the default may be. Additionally, a loan default can stay on your credit report for up to 7-years. Having a loan default on your credit report for 7-years can make getting any new forms of credit in the future quite difficult.
Aside from the damage to your credit profile, a lender may be able to sue you if you should happen to default on a personal loan. If a lender wins a judgment against you, they may be able to place a lien on an asset that you own like a home or vehicle. So, although personal loans are typically unsecured and the bank will not be able to repossess your vehicle like they can for a car loan, there are still severe consequences that can have repercussions for many years.
That being said, it is generally accepted that since a car loan is intended only to be used to purchase a vehicle that the borrower is using as collateral to secure the loan, then car loans are typically easier to get than unsecured personal loans. Car loans are more generally available to borrowers who may not have excellent credit, and often they come with lower interest rates than unsecured personal loans, depending on the credit score of the borrower and the lender they are working with.
Of course, the exception to this rule is secured personal loans. Secured personal loans do use a form of collateral to secure the loan. If you have good credit and are looking to use a home equity loan or a secured personal loan to purchase a vehicle, then those loan types may be just as easy to get as a car loan, however, if you are planning to use an asset anyway to secure the loan, you may as well use a car loan and not risk losing something you already own.

Is a personal loan cheaper than car finance?

Depending on your credit score and the lender you are working with, most often it is cheaper to finance a car than it is to obtain a personal loan. Since most personal loans are unsecured, lenders view them as far more risky than a car loan that is secured by the vehicle being financed. Because of this, lenders may feel inclined to offer lower interest rates on car loans than they do on unsecured personal loans.
Average car loan rates on a 5-year new car loan are expected to be around 4.4% by the end of 2022 and 4.85% for a 4-year used car loan. Even though car loan interest rates are on the rise in 2022, they still do not even come close to the interest rates that are currently being charged on personal loans, even for borrowers with the highest credit scores. As of February 2022, the average interest rate on a personal loan for borrowers with credit scores of 781 or above was 6.59%. Borrowers with credit scores between 661 and 780 averaged an APR of 10.93%, and borrowers with credit scores between 601 and 660 averaged APRs closer to 15.56% on personal loans. As you can see from the data, personal loan interest rates can be much higher than car loan rates, even if you have excellent credit and especially if you have fair or poor credit.

What's the difference between a personal loan and an auto loan?

There are a couple of key differences between personal loans and auto loans. First off, auto loans are for the sole purpose of purchasing a new or used vehicle whereas a personal loan can be used for just about anything. Personal loans are often used to consolidate debt, home improvement projects, to cover wedding expenses, finance larger purchases, or to simply help get caught up on monthly bills. Auto loans need to be used to finance a vehicle purchase and the vehicle that is purchased acts as collateral for the loan. If a borrower should happen to default on the auto loan, then the lender has the right to seize the vehicle to recover any potential losses. A personal loan is most often unsecured and it does not require collateral to qualify. You qualify for a personal loan simply based on the merit of your credit history and your income. Another key difference between personal loans and auto loans is interest rates. Typically, personal loan rates can be much higher than auto loan rates, especially if you have fair or poor credit.

Key differences: personal loan vs. auto loan

There are several key differences between a personal loan and an auto loan. Here are some of the key differences broken down so you can easily compare the two.
Personal loans
Can be used for almost any type of purchase
Can come with longer repayment terms
Should not require a down payment
Can come with higher interest rates
Harder to qualify for
Typically are unsecured loans

Auto loans

Must be used to finance a vehicle purchase

Can have shorter repayment terms

May require at least a 10% down payment although 20% is ideal

Can come with lower interest rates than other types of loans

Easier to qualify for than an unsecured personal loan

Loans are secured by the vehicle being financed

Can you use a personal loan for a car down payment?

Yes, technically you can use a personal loan for almost anything, including as a down payment to obtain an auto loan through a dealership on a new vehicle. However, do you really want to? If you have no other option, then it may be a way for you to get the vehicle you need when you need it, however, if you can wait it out, it is almost always better to simply wait until you have enough money saved up to make the down payment from your savings. If you have a decent credit score but you lack the funds for a down payment, you may be better off trying to find an auto dealer who offers zero money down, 0%-APR type of financing options rather than using a second loan to qualify for an auto loan.

When are car loans better than personal loans?

There are several circumstances where it may be better to get a car loan rather than a personal loan. For example, if you have fair or poor credit, it may be much easier to qualify for an auto loan rather than a personal loan. Additionally, car loan interest rates typically max out around 16% whereas personal loan rates can hit upwards of 36%. If you have just the bare minimum credit it takes to qualify for either an auto loan or a personal loan, most often you are going to see much lower interest rates with the auto loan. For most vehicle purchases, a car loan will be a better financial decision than a personal loan.

When are personal loans best?

A personal loan may be a better option for financing a vehicle if you are 100% reliant on your vehicle for employment and you cannot risk losing your car if something should happen and you default on the loan. It may be worth the higher interest rate to ensure that if things really do go south, you cannot lose your vehicle in the process. Also, a personal loan may be better than an auto loan if you are looking to purchase a used car from a family member or close friend and you prefer not to involve the bank or lender in the process. Last, if you are trying to purchase a classic car or a project car that you intend to restore or rebuild, then banks may not want to provide you with the financing you need. A personal loan can be used for almost any purpose you desire, including restoring or rebuilding classic cars. There may also be some instances where you may be on the hunt for an inexpensive, older, used vehicle that does not qualify for an auto loan. In this scenario, a personal loan could be a better choice than an auto loan.

Pros of financing a car with a personal loan

The main advantage of financing a car with a personal loan is not needing to use the vehicle as collateral to secure the loan. Although there are serious consequences to defaulting on a personal loan, you most likely will not be in jeopardy of losing your vehicle like you would with an auto loan.
No collateral required
No vehicle restrictions (i.e. vehicle does not need to be within a certain year range or mileage range)
Lower minimum loan amounts

Cons of buying a car with a personal loan

The main disadvantage of buying a car with a personal loan is the potential to pay more in interest over the life of the loan. Most often, personal loan interest rates can be much higher than car loan interest rates.
Higher interest rates
Origination fees and other fees

Pros of buying a car with an auto loan

The main advantage of buying a car with an auto loan is that auto loans typically have lower interest rates than personal loans. This is especially true if you have poor or fair credit. Auto loans typically cap their interest rates at around 16%, even for borrowers with the bare minimum credit scores. Personal loan interest rates on the other hand can reach upward of 36%. That is a maximum rate difference of about 20%.
Lower interest rates
You may qualify for higher loan amounts
Dealerships may offer special financing offers

Cons of buying a car with an auto loan

The main disadvantage of buying a car with an auto loan is that the loan is secured by the vehicle being financed. If you should happen to lose your job or fall into financial hardship, you could be at risk of having your vehicle repossessed if you start missing payments. This could make getting back on your feet even more difficult if you are unable to drive yourself to job interviews or to a new place of employment.
Vehicle can be repossessed if you default on payments

How auto loans vs personal loans affect your credit

Auto loans and personal loans affect your credit score in similar ways. If you take out an auto loan or a personal loan, they both can help you build your credit score if you continue to make your monthly payments on time and in full during the entire repayment period and until the loan is completely paid off. If you start submitting late payments, miss payments or even default on the loan, then you can cause severe damage to your credit score.

Why are auto loan rates so low vs personal loans

The main reason auto loans rates are much lower than personal loan rates is that an auto loan is a secured loan whereas a personal loan is most often an unsecured loan. Because an auto loan is secured with the vehicle being financed, the bank is allowed to take the vehicle and sell it to cover the remaining loan balance if the borrower should happen to default on the loan. Because the bank or lender has this lien on the vehicle, it makes the loans less risky in their eyes. A less risky secured auto loan can then be extended with a lower interest rate than a much riskier unsecured personal loan.

Is an auto loan secured or unsecured?

An auto loan is secured. When you take out an auto loan, the funds from the loan cannot be used for any other purpose other than the financing of a vehicle purchase. The vehicle being purchased is also the collateral or the asset that is being used to secure the loan. When you finance a vehicle with an auto loan, you do not actually own the car, the bank or lender does. Once you make the final payment and the title is transferred, then the vehicle is 100% under your ownership. You can transfer the title to a family member, you can sell the car at your discretion, or you could trade it in as a down payment on a new vehicle. Because auto loans are secured loans, they typically come with lower interest rates than unsecured personal loans.