Is personal loan better than car finance?
Most people need to borrow money to buy a new car. Many dealers offer loans, and banks offer specialized auto loans to help consumers purchase a vehicle. However, there are other options available to customers, such as personal loans.
Is it better to use an auto loan or a personal loan to buy a car? The answer is that it depends on your personal situation. Auto loans tend to offer lower interest rates than personal loans, and you might be able to take advantage of special deals like rebates when you get a loan from a dealer.
On the other hand, your car serves as collateral for an auto loan, putting it at risk of repossession if you can’t make loan payments. Unsecured personal loans don’t present the same risk for your car.
In this comparison:
When you’re applying for any loan, you should be shopping around and comparing different factors to find the best deal. When choosing between an auto loan and a personal loan, consider the following variables.
Generally, when you take out a car loan, you want to choose the least expensive option. In the majority of cases, this will be an auto loan just because they have lower interest rates than personal loans. Still, if you feel you might worry about having difficulty making loan payments and the lender potentially repossessing your car, you should factor that into your decision.
Auto loans are specifically designed for purchasing cars, which makes them a more straightforward option.
The first thing to consider when using an auto loan to buy a car is whether you want to work with a bank or get financing directly through the dealership. If you choose to get a loan from someone other than your dealer, you can apply directly with the lender. Meet with the lender to get a quote for an APR, loan term, down payment, and maximum loan amount. This will help you determine how much you can spend on your car.
Remember that you don’t have to take the full amount a lender is willing to give to you. Getting a smaller car loan means you’ll spend less on loan interest.
If you want to use dealer financing, you can go straight to the dealership and ask about financing while you shop. Even if you get financing from a bank or other lender, it can make sense to ask about dealer financing. Some dealers get kickbacks or benefits if you finance through them, so they might be willing to cut you a deal if they know you have a better offer than the one they initially made.
Many banks and credit unions offer auto loans to their customers, and there are even online lenders that specialize in car loans. You can also get financing directly through your car dealership.
Check out our guide to find the best auto loans.
Personal loans are flexible loans that you can use for almost any purpose. They rarely require collateral, so the primary criteria that lenders look at when you apply are your income and your credit score and history.
To apply for a personal loan, you’ll need to fill out the lender’s application. Typically, you have to provide information about your financial situation and income, as well as how much money you’d like to borrow.
Personal loans can be harder to get than other types of loans. You’ll need good credit to qualify, and you might pay a higher interest rate if you have a bad credit score.
You’ll also probably want to apply for a loan before you purchase a car. This lets you get the money in your account and gives you the chance to make a cash offer, which may result in a discount.
Otherwise, personal loans work like other loans. You’ll get a monthly bill and have to make a minimum payment. You also might have to handle origination fees or early repayment fees, depending on terms.
>> Read More: How do personal loans work?
Most people need to borrow money to buy a new car. Many dealers offer loans, and banks offer specialized auto loans to help consumers purchase a vehicle. However, there are other options available to customers, such as personal loans.
Is it better to use an auto loan or a personal loan to buy a car? The answer is that it depends on your personal situation. Auto loans tend to offer lower interest rates than personal loans, and you might be able to take advantage of special deals like rebates when you get a loan from a dealer.
On the other hand, your car serves as collateral for an auto loan, putting it at risk of repossession if you can’t make loan payments. Unsecured personal loans don’t present the same risk for your car.
In this comparison:
When you’re applying for any loan, you should be shopping around and comparing different factors to find the best deal. When choosing between an auto loan and a personal loan, consider the following variables.
Generally, when you take out a car loan, you want to choose the least expensive option. In the majority of cases, this will be an auto loan just because they have lower interest rates than personal loans. Still, if you feel you might worry about having difficulty making loan payments and the lender potentially repossessing your car, you should factor that into your decision.
Auto loans are specifically designed for purchasing cars, which makes them a more straightforward option.
The first thing to consider when using an auto loan to buy a car is whether you want to work with a bank or get financing directly through the dealership. If you choose to get a loan from someone other than your dealer, you can apply directly with the lender. Meet with the lender to get a quote for an APR, loan term, down payment, and maximum loan amount. This will help you determine how much you can spend on your car.
Remember that you don’t have to take the full amount a lender is willing to give to you. Getting a smaller car loan means you’ll spend less on loan interest.
If you want to use dealer financing, you can go straight to the dealership and ask about financing while you shop. Even if you get financing from a bank or other lender, it can make sense to ask about dealer financing. Some dealers get kickbacks or benefits if you finance through them, so they might be willing to cut you a deal if they know you have a better offer than the one they initially made.
Many banks and credit unions offer auto loans to their customers, and there are even online lenders that specialize in car loans. You can also get financing directly through your car dealership.
Check out our guide to find the best auto loans.
Personal loans are flexible loans that you can use for almost any purpose. They rarely require collateral, so the primary criteria that lenders look at when you apply are your income and your credit score and history.
To apply for a personal loan, you’ll need to fill out the lender’s application. Typically, you have to provide information about your financial situation and income, as well as how much money you’d like to borrow.
Personal loans can be harder to get than other types of loans. You’ll need good credit to qualify, and you might pay a higher interest rate if you have a bad credit score.
You’ll also probably want to apply for a loan before you purchase a car. This lets you get the money in your account and gives you the chance to make a cash offer, which may result in a discount.
Otherwise, personal loans work like other loans. You’ll get a monthly bill and have to make a minimum payment. You also might have to handle origination fees or early repayment fees, depending on terms.
>> Read More: How do personal loans work?
With so much money on the line, you might be wondering what kind of loan is best for you: a car loan or a personal loan? While you can use either type of loan to finance a car, one may be a better choice than the other for your situation. We’ll walk you through everything you need to know to make the right decision.
A personal loan is a type of unsecured loan that has a wide range of uses. Many people take out personal loans to consolidate debt at a lower interest rate, pay for house repairs or upgrades or cover car repairs. You can use personal loans for almost any type of expense, including financing a new car.
Personal loans generally come with higher interest rates than auto loans because personal loans are unsecured vs. secured.
While you typically don’t need to make a down payment, your lender may charge an origination fee. If it does, you can often have the lender take it out of the loan proceeds, so you’ll need to calculate how much extra to borrow to cover this fee. For example, if you’re borrowing $12,000 with a $500 origination fee, you’ll get $11,500.
Lenders look at several factors when you apply for a personal loan, and each one sets their own specific qualification requirements. In general, you’ll usually need a good credit score (670 or above) to qualify. Lenders will also look at your income to make sure you can afford the loan payments. If you’re self-employed, you may need to provide two years’ worth of tax returns to prove that you have a consistent earnings history.
Related: The Best Personal Loans Of 2023
An auto loan, on the other hand, is a secured loan that uses your car as collateral. This means that if you fall behind on payments or default on the loan, the lender can repossess your car to recoup its losses.
Since the lender is guaranteed to get paid one way or another, it’s less risky for them to loan you the money. And because it’s less risky, they pass those savings on to you in the form of a lower interest rate, which can save you a lot of money over the life of your loan.
Just like with personal loans, each auto loan lender has its own qualification requirements. Since auto loans are secured, they can often be easier to qualify for, especially if your credit isn’t the greatest. While we recommend a score of at least 670 to receive the most favorable terms, you may be able to qualify for an auto loan with a lower score, depending on your debt-to-income (DTI) ratio and down payment amount.
What’s more, getting an auto loan can be trickier in some ways because most lenders are only willing to lend on certain model years or types of vehicles. For example, if you’re financing an old car or a fixer-upper, it might be challenging to find an auto loan. However, if you’re looking for a new, everyday commuting car, chances are a lender will lend you the money for a car you choose that you can afford.
Personal loans and car loans are two common financing options for major purchases, but a car loan is often better for buying a car.
The main difference between a personal loan versus a car loan is that a personal loan is typically unsecured, meaning it has no collateral. An auto loan is usually backed by the car, so the lender has lower risk if you default on the loan. Auto loans generally have lower interest rates. A personal loan can be used for many different purposes, including buying a car, whereas a car loan is only for buying vehicles.
Learn more about the similarities and differences between personal loans versus car loans.
A personal loan provides you with funds from a lending institution like a bank in a lump sum. You can use the money at your discretion, such as to pay for a vacation, wedding, or home improvement.
Most personal loans are unsecured. However, a personal loan can be secured against an asset such as a vehicle or home. If a personal loan is secured, the lender can seize your asset to recover its losses if you don't repay the loan.
Generally, unsecured loans have higher interest rates than comparable secured loans with collateral. Unsecured personal loans also come with more stringent approval requirements, so you’ll need credit if you want lower rates. If your credit history is poor, you may not get approved for a personal loan.
Your credit score will influence both the loan amount and the interest rate. The better your credit score, the more likely you are to qualify for larger loans with lower interest rates.
Personal loans have a set repayment period such as 12 months or 36 months. Longer loan terms will lower your monthly repayment, but you’ll be paying more interest over the term of the loan. Conversely, shorter loan terms mean higher monthly repayments, but incur less interest overall, since you are paying off the principal faster.
A car loan is secured with the vehicle you purchase. If you default on your repayments, the lender can seize your car to try to recoup its losses. Much like with a mortgage, the lender retains ownership over the asset until you make the final payment.
Car loans are paid off in fixed monthly installments with varying terms and interest rates. One common car loan term is five years.
Given that the lender has the collateral of the car backing the loan, the loan is considered lower risk. So, you will generally get a lower lower interest rate than on a personal loan. Interest rates are also fixed, so you will know what to expect with your monthly payments.
Most car loans are fixed at 36, 48, 60, or 72 months. And like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A less-than-average credit history won’t necessarily prevent you from getting a car loan.
There are a variety of ways to get car loans. Before signing up for a dealer loan, shop around for car loans from your bank or credit union, which can often give you better deals.
If you’re researching your financing options, you may be thinking about taking out a personal loan rather than an auto loan. The idea can be appealing: You can get the money you need in as little as a day, and there’s no need to use collateral or make a down payment. But is it a wise decision?
Here’s what you need to know about personal loans vs. auto loans.
When it comes to financing options, you can use either a personal loan or auto loan to buy a car. However, they work very differently from one another.
Personal loans are offered by banks, credit unions, and online lenders. They’re typically unsecured, meaning they don’t require you to put down any property as collateral. Instead, lenders look at your creditworthiness — meaning factors like your credit score, income, and current debt — to decide whether or not to issue you a loan and to determine your interest rate. And personal loans don’t require a down payment.
Personal loans offer more flexibility than auto loans. Lenders usually don’t have restrictions on how you use the money, so you can take out a loan to pay for a car, finance a vacation, or to consolidate high-interest credit card debt.
Personal loan interest rates can vary widely; you’ll see rates as low as 5% and as high as 30%. Because personal loans are unsecured, they tend to have higher interest rates than secured loans. According to the Federal Reserve, the average interest rate on a personal loan with a two-year loan term was 10.16% as of the third quarter of 2022.
Like personal loans, auto loans are offered by banks, credit unions, and online lenders. However, auto loans are secured, meaning your car serves as collateral on the loan. And lenders often require you to make a down payment for some of the car’s value.
Because they’re secured, car loans tend to have lower interest rates than personal loans. According to Experian, the average interest rate on a car loan for a new vehicle is 5.16%.
In most cases, it makes more sense to take out an auto loan than to apply for a personal loan to buy a car. However, there are some exceptions to the rule:
Using an auto loan to buy a car is a sound financial decision in the following scenarios:
If you’re buying a new vehicle or a used car that’s less than 10 years old with under 100,000 miles, it’s likely a better idea to take out an auto loan than a personal loan. You should have no trouble qualifying for a loan with that car’s age or mileage, and you’ll be able to get a lower interest rate than you probably would with a personal loan.
If you’re buying a car from a dealership rather than a private party, an auto loan is usually a better approach. You can secure your own financing ahead of time through a bank or a credit union. Or you can work with the dealership to find a loan. You may be able to save even more money with this strategy, as dealerships often offer 0% financing to qualified candidates.
Because personal loans are usually unsecured, lenders will review your income and credit score to decide how large of a loan to offer you. If your credit score is less than stellar, you may be able to qualify for only a small loan that’s insufficient to buy a car.
By contrast, auto loans are secured, so you can usually qualify for a higher loan amount than you’d get with a personal loan.
In general, personal loans tend to have shorter repayment terms — usually between two and five years. By contrast, auto loans often have longer possible terms. You could qualify for a loan term as long as seven years, reducing your monthly payment.
Keep in mind that a longer loan term isn’t always a good thing. Over the course of your loan, you’ll pay more in interest fees than you would with a shorter term. However, that trade-off may be worth it to you to get more breathing room in your monthly budget.
Follow these steps to find the best financing options for you:
