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:
- 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!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|