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Personal Loan Vs. Auto Loan: How Do They Compare?

Hanna Kielar8-Minute Read

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If you’re interested in buying a car, be prepared to make a few important decisions before driving off the lot. Will it be a new or used car? What make and model would you prefer? And most importantly, how will you pay for it?

As new and used vehicle prices continue to increase, it’s important to consider your options for financing this substantial purchase. If you’re planning to take out a loan to cover the cost of your next car, consider your personal and auto loan options to find the best fit for your financial situation.

In this article, we’ll review the differences between personal loans and auto loans, and help you decide which option is right for you.

Personal Loan Vs. Auto Loan: What’s The Difference?

Before we dive into how personal loans and auto loans (also known as car loans) can be used to finance auto purchases, let’s examine how both loan options work.

What Is A Personal Loan?

A personal loan is a type of credit that allows you to borrow a predetermined amount of money from a bank, online lender or credit union. This type of unsecured loan comes with a fixed interest rate, as well as a set amount of time to repay the loan.

Personal loans are known for their flexibility, meaning they can be used for a variety of reasons. Some of the most popular uses for personal loans are home improvement, debt consolidation and large purchases. 

  

While you don’t need to make a down payment on a personal loan, your lender may charge an origination fee. Once you’re approved for a personal loan, you’ll begin making payments on it every month for the life of the loan, which is why it’s vital to ensure that you can commit to the set payment schedule.

What Is An Auto Loan?

An auto loan is a type of secured loan that requires borrowers to use their car as collateral. Since the loan is secured against the car, auto loans are usually easier to qualify for and have low interest rates. However, similar to personal loans, qualification requirements and interest rates vary by loan lender.

If you’re considering taking out an auto loan, make sure you have enough saved for the down payment. It’s possible to secure an auto loan with no down payment, but you’re more likely to get stuck paying a higher interest rate.

Auto loans can also be tricky because most lenders will only approve funding for certain types of cars or model years. So while your loan lender would be happy to lend you the money to purchase a new car, they may not fork over the cash for a decades-old fixer-upper.

Apply For A Personal Loan.

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The Pros And Cons Of Using A Personal Loan To Buy A Car

At this point, you may be wondering whether you can use a personal loan to buy a car. The simple answer is yes, but you should weigh your options against an auto loan. Let’s take a look at the factors you should consider when deciding whether to use a personal loan to purchase a car.

The Pros Of Using A Personal Loan To Buy A Car

  • No down payment. Personal loans don’t require borrowers to pay a down payment, which is especially helpful when you need money in a pinch. This feature is attractive to car buyers who would otherwise be required to put a down payment on an auto loan.
  • No car restrictions. Once the money is in your account, you can spend the loan amount on any car make, model or type that you want. Unlike auto loans, personal loans do not have restrictions that dictate what type of car you can or cannot purchase.
  • No chance of car repossession. If you purchase a car using an unsecured personal loan, you are not required to use the car as collateral. This means that even if you default on the loan, the lender can’t repossess your car, although you will face other consequences from the lender.

The Cons Of Using A Personal Loan To Buy A Car

  • Higher interest rates. In comparison with auto loans, personal loans usually have higher interest rates because they are unsecured. In the long run, you’ll pay much more for a shorter personal loan than a longer-term auto loan.
  • More qualification restrictions. To qualify for a personal loan, lenders will evaluate your credit score and history, income, debt-to-income ratio, savings amount and even your employment history. These restrictions make it more difficult for people with bad credit or high levels of debt to obtain a personal loan.
  • Additional loan fees. As mentioned above, many loan lenders tack additional fees onto the personal loan. Origination fees can range from 1 – 10% of the total loan amount, which may require borrowers to increase their loan amount to cover the cost.

The Pros And Cons Of Using An Auto Loan To Buy A Car

Overall, it’s cheaper and easier to finance your car purchase with an auto loan rather than a personal loan. However, it’s still important to understand the benefits and drawbacks of this loan option. Let’s review the factors you should consider when deciding whether to take out an auto loan.

The Pros Of Using An Auto Loan To Buy A Car

  • Most affordable option. If you need to take out a loan to cover your next car purchase, an auto loan will be your least expensive option. With lower monthly payments and long-term interest savings, this loan option is simply more affordable.
  • Less restrictive qualifications. Since the loan lender’s investment is protected by the collateral requirements of the auto loan, they’re more lenient with their credit requirements. Although it helps to borrow with a higher credit score, it’s still possible to get an auto loan with a less-than-perfect credit history.
  • Offered by car dealerships. Along with being offered by traditional loan lenders, auto loans can also be provided by the car dealership that sold your vehicle. Pro tip: Bring preapproved offers from other lenders to the dealership to negotiate an even better deal.

The Cons Of Using An Auto Loan To Buy A Car

  • Down payment. A major drawback of auto loans are the down payment requirements that most lenders observe. However, the larger the down payment, the shorter the loan term and, in some cases, the lower the interest rate.
  • Risk of car repossession. When you use your car as collateral on the auto loan, you run the risk of losing the car through repossession in the event of a loan default. While this could be seen as a deterrent, it’s important to keep in mind that using the car as collateral allows borrowers to secure more favorable loan terms.
  • Car restrictions. Auto loans require the purchased car to be made within a certain period of years – and they also require the car to be in working condition. While this encompasses a wide range of cars, it might restrict you from purchasing a vintage model.

What Type Of Loan Should I Use For Auto Repairs?

After you take your car home, you’re responsible for its upkeep and repairs. That means that if the car falls into disrepair or there’s damage not covered by insurance, you’ll have to figure out a way to pay for it.

Some of the most expensive car repairs, such as replacing the engine or transmission, can cost thousands of dollars. If you can’t afford the out-of-pocket expense of your auto repairs, consider financing with a personal loan. Similar to a credit card, once you’re approved, you’ll receive the funding within a few business days, and you can pay the loan off in monthly installments.

How Do I Get A Personal Or Auto Loan?

Whether you’re planning to apply for a personal or auto loan, there are several steps to take before signing on the dotted line. Here’s how to get a personal loan or an auto loan:

  • Secure your credit report. Since you’ll be using your credit and financial information to apply for a loan, it’s a good idea to double-check its accuracy. Reviewing your credit score beforehand can also help you gauge the interest rate that your loan lender will offer.
  • Shop around for lenders. Once you’ve decided what kind of loan to pursue, you should shop around for interest rates and other loan terms at various lenders to find the best deal.
  • Apply for prequalification or preapproval. The prequalification step allows you to preview the lender’s loan amount and terms for you, without affecting your credit score. Some auto loan lenders offer preapproval, but keep in mind that a hard credit inquiry will be reflected on your credit history.

Apply For A Personal Loan.

Explore your options today and see what's possible in one simple click.

Final Thoughts: Weigh Your Loan Options Carefully

If you’re debating between purchasing a car using a personal loan versus an auto loan, keep your budget and priorities top of mind.

Auto loans are the more affordable way to pay for a new or used car, but any auto loan will most likely require a down payment at signing. On the other hand, personal loans for cars may be the preferred option for borrowers who don’t have down payment funds ready or who don’t want to use their car as collateral for the loan.

If you’re ready to explore your personal loan options, start by applying for an auto personal loan through Rocket Loans®, which provides lump-sum funding for any vehicle-related expenses or repairs.

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    Hanna Kielar

    Hanna Kielar is an Associate Section Editor for Rocket Mortgage focused on personal finance, recruiting and personal loans. She has a B.A. in Professional Writing from Michigan State University.