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Personal Loan vs. Auto Loan: Which Is Best for Financing a Car?

Matthew Levy Updated: June 27, 2023 • 3 min read

Auto loans are the third-largest component of US household debt, behind student loans and home financing. Inflation has jacked up car prices, and Americans are now looking for new ways to finance a car. Car dealerships offer direct or indirect auto financing that can be cheaper than bank loans.

You can sometimes use your personal loan or even a HELOC to buy a new car. In this article, we delve deep to explore the pros and cons of using a personal loan vs auto loan for your new vehicle.

Key Differences: Personal Loan vs. Auto Loan

The differences between personal loans vs. auto loans boil down to their APR. Where you fit inside the APR range depends on your credit score and repayment capability. Typically, lenders charge 1.5 times more APR for used cars than new cars.

  Personal Loan  Auto Loan 
Typical loan amount $50,000 $40,000
Typical APR range 5.7-35.99% 2.4-20.9%
Typical repayment term 12-84 months 24-84 months
Secured No Yes
Down payment Nil 10-25%
Limitations No limitations Can only be used to purchase a personal-use vehicle

What Is a Personal Loan?

A personal loan is an unsecured loan that you can use without any end-use restriction. A personal loan can be an excellent alternative to credit cards as you can pay bills, pay for repairs/upgrades, refinance debt, or even buy a new car. Personal loans usually have higher interest rates than auto loans because they are unsecured, and your car is not used as collateral.

Personal loan qualification requirements vary between lenders, and you may need a soft credit check to get your final APR. If you have a good credit score (700+) and a high income-debt ratio, you can get suitable terms and low APR on a personal loan for a car.

  • Fixed APR: 6.99 - 35.99%
  • Loan Term: 12-84 months
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sofi logo
  • APR: 8.99-25.81%
  • Loan Term: 24-84 months
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5K Funds
  • APR: 5.99-35.99%
  • Loan Term: 2-72 months
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What Is an Auto Loan?

An auto loan is a secured loan that you can only use to purchase a car. Being secured makes an auto loan cheaper than a personal loan but often comes with restrictions. Lenders can charge more for used vehicles or specific models of new cars. Lenders can also repossess your car if you fail to make timely payments.

Auto loan qualification requirements usually depend on your credit score, debt-to-income ratio, down payment amount, term length, dealer commissions, and type of car. The term of your auto loan can affect your APR since cars lose value over time.

Typically, an auto loan ranges from 24-60 months, though you can find lenders offering up to 84 months for higher interest. If you are taking a long-term auto loan, make sure your loan has no pre-payment charges so that you can repay or refinance at any time without paying extra.

Pros & Cons of Using a Personal Loan vs. Auto Loan

If you are confused over a personal loan vs auto loan, here are some tips to help personalize your circumstances to make a better financial decision.

Pros of Using a Personal Loan for Purchasing a Car 

  • Zero Down Payment
  • No Repossession Risk
  • No Restriction on Car Type

Cons of Using a Personal Loan for Purchasing a Car 

  • Higher APR

Pros of Using an Auto Loan vs. Personal Loan

  • Lower APR
  • Quicker than Personal Loans
  • Add Cosigner for Lower APR

Cons of Using an Auto Loan vs. Personal Loan

  • Dealership Commissions
  • Insurance Costs
  • Down Payment Requirement
  • Repossession Risk


You can use a personal loan limit if you need to borrow only a small portion of your new car purchase. An auto loan can be a cheap alternative to a personal loan for a car. However, you may have to choose the loan term judiciously to avoid paying a high APR. You can also combine the two by taking a small auto loan and paying a chunk of the car price as a down payment with a personal loan.



Do personal loans have higher interest rates than auto loans?

A personal loan is usually more expensive than an auto loan because it is unsecured, and lenders charge more as a risk premium. It is also considered the main advantage of taking personal loans on car purchases since your car won't be taken away in case of default.

Is it better to get a car loan or bank loan?

Whether a car loan is better than a bank loan depends on your circumstances. You can get a car loan for a lower APR, but you need to make a down payment, and the lender can repossess your car if you miss loan payments. If you have a good credit score and can use your personal loan limit, you may avoid taking a car loan.

What's a good APR for a car?

The APR for a car depends on your Credit Score Category. Super Prime (781-850): 2.4-3.7% Prime (661-780): 3.5-5.5% Non-Prime (601-660)- 6.7-10.4% Subprime (501-600) - 10.8-17.2% Deep Subprime (300-500)-14.7-20.9%

What month is it best to buy a car?

The best month to buy a car is between October-December. Car companies ramp up discounts to clear stock and boost annual sales. Car prices may also come down during new launches in a particular segment.

Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.