Personal Loan vs. Auto Loan: Which Should You Use to Buy a Car?

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

personal loan vs auto loan, buying a car, car dealership
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Buying a car can be a frustrating process. But it could go a lot smoother if you know how you’ll be paying for the car. After all, about 85% of new car purchases — and 54% of used car purchases — are financed, according to Experian data from the first quarter of 2018.

As you figure out the best way to finance your next car, you may be weighing the pros and cons of a personal loan versus an auto loan. Although both are installment loans with APRs and monthly payments, one is likely better for your purchase.

Find out how you can determine which loan is best for you.

Personal loan vs. auto loan: Which is right for you?

Interest rates for both auto loans and personal loans are based on your credit history. Auto loans typically award lower rates, so they should be your default choice regardless of your credit score. Personal loan interest rates, for example, can be as high as 36.00%, even from top-rated personal loan companies.

Before borrowing, you’ll want to understand every aspect of your loan agreement. Most importantly, confirm you have the income and savings to afford your monthly payments.

If you have bad credit …

If you’re trying to buy a car with bad credit, you could be stuck with a high APR for either loan type or be forced to take out a secured personal loan.

You might be better off taking the time you need to improve your credit score and save up a large down payment. That’ll put you in a much better position to repay your auto loan without a hiccup.

If you’re unable to qualify for an auto loan from a dealership or lender, taking out an unsecured or secured personal loan may be your only options.

Both auto loans and secured personal loans may require you to put up the car you’re purchasing as collateral. If you default on either type of loan, you could lose the title to your car.

If you opt for an unsecured personal loan, you’d keep the title of your car even if you struggled in repayment. However, you’d suffer other consequences, such as facing collections.

One workaround would be to find a personal loan cosigner. You could ride the coattails of their longer, stronger credit history to a lower personal loan rate.

If you have good credit …

With solid to stellar credit, it’s wise to at least consider a personal loan. Top lenders may offer you a competitive rate, plus perks that an auto loan won’t include. SoFi, for example, offers unemployment protection on personal loans, allowing you to pause your repayment in the event of a job loss.

If you have good credit but aren’t finding many attractive personal loan offers, you could always go with an auto loan.

Ultimately, taking out a personal loan to purchase a car is rarely a good idea. That’s because you’ll be paying more than what the car is worth, thanks to the relatively higher interest rate. Plus, you have to consider that a car is a depreciating asset, losing significant value as soon as you drive it off the lot.

One exception to this rule would be if you need a car to commute to work and a personal loan is your only realistic avenue to paying for it. Just ensure your salary would cover the increased cost of your wheels, along with every other line item in your budget.

How to get the best auto loan for you

You can find used car loans and new car loans at dealerships, banks, credit unions, and online lenders. Although it might seem more convenient to work with a dealership, you might save hundreds or thousands of dollars by financing elsewhere.

Make sure to compare the following offered by each lender:

  • APRs
  • Repayment term options
  • Fees associated with the loan

As with other installment loans, your quote will be determined mostly by your credit history. With excellent credit, for example, you might qualify for 0% APR on a short-term loan advertised by dealerships looking to clear out older models. Up until early July 2018, for example, there are zero-rate offers on 2017 Chevy Cruzes.

Because auto loans are secured, interest rates are relatively lower. But you could decrease your quoted interest rate — and save on interest charges during repayment — by making a sizable down payment in cash.

How to find a personal loan for your car purchase

Like auto loans, personal loans are available from banks, credit unions, and online lenders. Offers awarded are also primarily based on your credit history.

Personal loan payments are made each month over a number of years. Just as you would with auto loans, make sure you shop around, find the right repayment plan, and avoid unnecessary fees.

However, it’s more difficult to receive a low, fixed interest rate on a personal loan without tip-top credit. That’s because personal loans are generally unsecured, meaning that you don’t post collateral to borrow.

Without being able to seize your car or other personal property, lenders tend to charge higher interest rates on personal loans for bad credit borrowers.

Of course, there are secured personal loans that allow you to put up the car’s title as collateral. But you’d need a certain level of credit to receive a competitive APR.

There’s a lot to consider when choosing how to finance your new or used wheels. If you’re not ready to end the personal loan versus auto loan debate, review all of the ways you can afford a car.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.