Knowing the main differences between personal and auto loans can help you make more informed financial decisions when financing a large purchase. Whether you purchase a new car or incur significant expenses like a home renovation or medical bills, the right loans can save you money and stress. In this guide, we will explain some key information you need about personal vs. auto loans, including interest rates, loan terms, credit score impacts, and so much more!
A personal loan is an unsecured loan offered by banks, credit unions, and online lenders. It can be used for many purposes, including—but not limited to—medical expenses, debt consolidation, vacations, home repairs, and even transportation, namely, vehicle purchases.
Unsecured loans mean lenders require no collateral or assurance to offer you this loan. When offering personal loans, lenders rely heavily on your credit score, income, and debt-to-income ratio to determine approval.
Loan amounts: $1,000 to $50,000
Loan terms: 1-7 years
Interest rates: Per lender, the creditworthiness of the borrower. Often in the 6%-36% range.
Repayment: Fixed monthly payments during the agreed loan term.
An auto loan (compared to a personal loan!) is a secured loan specifically for buying a vehicle. The vehicle itself is collateral; if you don’t make the payments, the lender can repossess it.
Auto loans are available from dealerships, banks, credit unions, and specialized auto finance companies. Because they’re secured, the interest rates for auto loans are typically lower than those for personal loans, especially for borrowers with good or excellent credit.
Loan amounts are based on the vehicle's value.
Loan terms: typically from 36 to 72 months
Interest rates: typically 3-10% for qualified buyers
Repayment: fixed monthly payment; there may be prepayment penalties.
Understanding the key differences between personal and auto loans can clarify which option suits your financial needs. Here’s a detailed breakdown:
Personal Loan: Can be used for any legal purpose.
Auto Loan: Specifically for purchasing a vehicle.
A personal loan is your only option if you want to finance something other than a car. But if you're buying a car, both loan types are available, so it's crucial to compare.
Personal Loan: No collateral; higher risk for lenders.
Auto Loan: Vehicle acts as collateral; lowers lender risk.
Since auto loans are secured, they often have better interest rates than personal loans, which require the lender to take on more risk.
Personal Loans: Higher average rates due to lack of collateral.
Auto Loans: Lower rates, especially if you have a strong credit profile.
Borrowers with a high credit score might secure personal loans with competitive rates, but auto loans tend to offer lower rates overall.
Personal Loans: Shorter loan terms (1–7 years).
Auto Loans: Typically have loan terms of 3–6 years.
Longer loan terms on auto loans may result in smaller monthly payments, but you could pay more interest over time.
Both loan types affect your credit score, particularly in the following ways:
Application leads to a hard inquiry.
Payments influence payment history, a significant component of credit scores.
Loan balances impact your credit utilization ratio.
Timely repayments on either loan will improve your credit profile, but missed payments can significantly lower your score.
Your choice between a personal vs. an auto loan depends on several factors, including your credit score, financial goals, the vehicle you want, and other financing options.
You’re buying a used car from a private seller who doesn’t offer dealership financing.
You want to finance multiple expenses, not just a car.
You have excellent credit and can secure a favorable interest rate.
You want a new or certified pre-owned vehicle from a dealership.
You’re looking for lower interest rates and longer loan terms.
You’re comfortable with the car acting as collateral.
Interest rates play a significant role in your overall repayment. On average:
Personal loan rates are higher due to increased lender risk.
Auto loan rates are lower, but your car can be repossessed if you default.
Also, personal loan rates are usually fixed, whereas auto loans may have promotional rates that adjust later.
Getting approved for a personal vs. auto loan varies:
Based primarily on credit score, income, and debt ratio.
Some lenders approve within 24 hours.
Funds can be used flexibly.
Takes into account vehicle value, credit score, and income.
It can be fast if done through a dealership.
Limited to use only for car purchases.
Tip: Improve your credit score before applying to qualify for better rates and financing options.
We want you to know that understanding your financing options helps you tailor the loan to your unique situation.
Banks & Credit Unions: May offer loyalty perks for existing customers.
Online Lenders: Faster processing, competitive rates.
Peer-to-Peer Lenders: An alternative option for those with non-traditional credit profiles.
Dealership Financing: Convenient but not always the best rate.
Bank/Credit Union Loans: Can be pre-approved before visiting the dealership.
Manufacturer Promotions: Some offer 0% APR for qualified buyers.
Pro tip: Always compare offers from multiple lenders before making a decision.
Choosing the right loan term balances affordability and total interest cost.
Shorter loan terms = higher monthly payments but less total interest.
Longer loan terms = lower payments but more total interest.
With a personal loan, you might have less flexibility in term length than with auto loans, which often offer multiple options (36, 48, 60, or 72 months).
Let’s summarize the strengths and drawbacks of both options:
Flexible use of funds
No vehicle repossession risk
Fixed monthly payments
Higher interest rates
It may be harder to qualify for with poor credit.
Smaller loan amounts
Lower interest rates
Easier to qualify with decent credit
Higher loan amounts for vehicle purchases
The vehicle can be repossessed.
The loan is restricted to vehicle use.
May include dealership or manufacturer conditions
Your credit score is a key factor in both personal and auto loan decisions :
Excellent (720+): Eligible for the best rates and terms
Good (680–719): Likely to qualify, though not always the best rates.
Fair (580–679): May face higher rates or limited approval
Poor (<580): Will struggle with approval and face high interest rates
Improving your credit before applying can drastically enhance your financing options and loan affordability.
When considering a personal vs. auto loan payment method, you're unlikely to start with the absolute correct answer. Your financial status, credit rating/score, and intended use of the funds will all be vital. If you want flexibility and are comfortable with your credit history, going the personal loan route may work out great for you. On the other hand, if you need a vehicle-specific type of loan or lower rates, I would be inclined to take the auto loan option.
Regardless of your path, you can evaluate interest rates, loan terms, and financing options before committing. Smart borrowing starts with education.
This content was created by AI