Personal Loan vs Auto Loan: Which Is Better for Buying a Car?

However, a personal loan may be a better choice if you want flexibility, don’t have a down payment, or plan to use the funds for multiple expenses.

What Is an Auto Loan vs a Personal Loan?

An auto loan is a secured loan used specifically to buy a car, where the vehicle serves as collateral.

A personal loan is typically unsecured and can be used for various purposes, including buying a car.

When buying a car, one of the first decisions is how to finance it — whether through a personal loan or an auto loan.

Essentially, a car loan is designed only for buying a car. Usually, you’ll get a car loan from your dealership, although there are also online lenders that offer auto loans. Your auto loan is secured against the car that you buy, and will usually have fixed interest rates for a longer term.

A personal loan is available from a few different lenders: banks, credit unions, or online lenders, to name a few. You can use a personal loan for many purposes, such as paying for a vacation, financing a wedding, making home repairs, or buying a car. Personal loans are much more varied, as they can be secured or unsecured, have fixed or variable rates, and be long- or short-term.

Auto Loan vs Personal Loan: Key Differences

Here’s a quick comparison between auto loans and personal loans when buying a car:

	Auto Loan	Personal Loan
Flexibility of use	Only for buying cars under a certain age	Buying a car of any age, upgrading the sound system, vacations, etc
Credit requirements	Lower	Higher
Approval time	Same day (dealership)	A few days–weeks
Fixed or variable rate?	Fixed rate	Fixed or variable
Early prepayment penalties	Yes	No
0% financing available	Yes	No
Do you need a deposit	Yes	No
Lowest average interest rates	4%-4.5%	5%-5.5%

In most cases, auto loans offer lower interest rates and faster approval, while personal loans provide more flexibility.

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When Should You Choose a Personal Loan vs an Auto Loan for a Car?

Choose an auto loan if:

• You want lower interest rates

• You need fast approval at a dealership

• You have average or poor credit

• You’re buying a standard new or used car

Choose a personal loan if:

• You want flexibility in how you use the funds

• You don’t have money for a down payment

• You plan to cover multiple expenses with one loan

• You have excellent credit and can qualify for competitive rates

Which Loan Is Cheaper for Buying a Car?

In most cases, auto loans are cheaper than personal loans because they are secured by the car, which reduces risk for lenders and leads to lower interest rates.

Personal loans typically have higher rates because they are often unsecured, which means there’s greater risk for the lender.

However, if you have excellent credit, you may qualify for a personal loan with competitive rates — especially if you don’t want to make a down payment or prefer more flexibility.

What’s the Difference Between an Auto Loan and a Personal Loan?

Although every loan is different, there are some key differences between an auto loan and a personal loan. These are critical for your decision about which type of loan to choose.

Flexibility

Personal loans are far more flexible than car loans. You can use a personal loan to buy a car, repair your home, or make any other large purchase. This means that if you have a few large expenses to cover in the same period, you can use one loan to finance all of them together. Because a personal loan is more flexible, it also gives you more choice when choosing which car to buy. You can use a personal loan to pay for changes or upgrades to your new car, like a new paint job, better speakers, or fancy upholstery.

In contrast, a car loan only covers buying a car. You usually won’t be able to use it to make changes to your new car, like changing the seat covers or upgrading the tires. Some car loans only cover new cars, or cars that are below a certain age. You might also be restricted to buying only certain types of car, or not be able to use a car loan for a 4x4 or a truck.

Credit Score

Your credit rating is far more important for a personal loan than for a car loan. Because most personal loans are unsecured, you need to have good or excellent credit in order to get favorable interest rates. If you have poor credit, you may not be able to qualify for a personal loan at all.

On the other hand, car loans are secured against the value of the car that you're buying. That means that your car acts as collateral, so your credit score is less important when applying for the loan. If you have poor credit, you could still be accepted for a car loan and get good interest rates.

How Long it Takes

If you need a car in a hurry, then the amount of time it takes to get the funds through is a big issue. Personal loans can take a while to process—up to a few weeks. In contrast, you’ll generally be offered financing and agree to the terms of a car loan on the spot in a car dealership. Car loans are far quicker and more convenient.

Repayment Terms

In general, personal loans have higher interest rates than car loans. This is because they are usually unsecured. Car loans use the car as collateral, so that helps to lower your interest rates, although it also means that you won't own the title to the car until you finish paying off the loan.

It’s worth noting that you could get a secured personal loan that uses your new car as collateral, but in that case, you won't find it very different from a dedicated car loan.

Most personal loans allow you to choose between fixed or variable rates. Variable repayments tend to allow you to pay off the loan early without any penalties. This makes it a particularly good choice if you expect that you'll be able to pay off the loan before the term ends. Car loans almost always have fixed interest rates, so you can predict what your payments will be each month. However, it also means you can't pay them off early.

If you get a car loan through a dealership, you might be able to access special offers like 0% interest rates and $0 deposits, so it’s worth doing some research to see what extras you can get.

Deposit

Most car loans require you to provide a deposit in order to qualify for the loan, which can be a problem if you don’t have much in your bank account. With a personal loan, you won’t need any down payment.

Personal Loans vs. Car Loans: The Pros and Cons

Now that we’ve reviewed what makes personal loans different to auto loans, we can compare the pros and cons of car loans vs. auto loans for buying a car.

Pros of Using a Personal Loan to Buy a Car

• You’ll have more flexibility to spend some of your loan to change the paint color or to spend the excess on a new sound system
• You can usually pay off a personal loan early without any prepayment penalties
• You won’t need a deposit

Cons of Using a Personal Loan to Buy a Car

• Interest rates are usually higher than an auto loan
• If you don’t have good credit, you won’t be eligible for a competitive loan
• Variable interest rates mean that you won’t be certain how much you’ll have to pay each month
• The application process usually takes longer than for an auto loan

Pros of Using an Auto Loan to Buy a Car

• Interest rates are usually lower
• You’ll be able to plan your monthly payments better because interest rates are generally fixed
• You can still qualify for good interest rates even if you have poor credit
• The application process is fast—you can usually get auto financing on the spot in a car dealership
• Car dealerships often have special offers such as 0% financing

Cons of Using an Auto Loan to Buy a Car

• It might not cover the type or age of car that you want to buy
• You won’t be able to use an auto loan for any other purposes, like repainting the car or upgrading the tires
• You won’t have ownership of the title to the car until you finish repaying the loan
• If you default on loan payments, you’ll lose your car
• You need a deposit
• You usually can’t pay off the loan early

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Which is Right for You: Personal Loan or Auto Loan?

In general, we recommend using a car loan to finance your new car. You’ll generally get lower interest rates and faster financing, and with some research, you could find excellent deals that mean you won’t need to pay a deposit. Because a new car depreciates in value so quickly, if you choose a personal loan, you’ll probably end up paying a lot more than its worth in interest payments. Additionally, a car loan is one option for customers with poor credit.

That said, there are some circumstances when a personal loan is a better choice. This includes if you can't get the money together for a down payment, if you want to make a lot of large purchases with a single loan amount, and/or if you have an excellent credit score that allows you to unlock favorable rates.

Frequently Asked Questions About Auto Loans vs Personal Loans

Is it better to use a personal loan or an auto loan to buy a car?
In most cases, an auto loan is better because it offers lower interest rates and faster approval. A personal loan may be a better option if you need flexibility or don’t have a down payment.

Can you use a personal loan to buy a car?
Yes, personal loans can be used for any purpose, including buying a car. However, they usually have higher interest rates than auto loans.

Which loan is easier to get with bad credit?
Auto loans are generally easier to get with bad credit because they are secured by the vehicle.

Do auto loans require a down payment?
Most auto loans require a deposit, but some lenders or dealerships offer $0 down financing.

Are auto loans cheaper than personal loans?
Yes, auto loans are usually cheaper because they are secured, which reduces the risk for lenders and results in lower interest rates.