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

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.

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.

Matthew Levy Matthew Levy Last update:
Matthew is a freelance financial copywriter with 10+ 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.