Sharad Thakur

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:

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