Personal and auto loans are some of the most popular financing options for consumers. An auto loan is typically used to purchase a vehicle while a personal loan could be used for a wider variety of expenses. These financing options may also vary regarding interest rates, required down payment, collateral, repayment terms, funding amounts, qualification requirements, etc.
These loans are pretty different from each other but do have some similarities. Not sure which option is the right one for you? Below you will find everything you need to know about personal loans vs. auto loans.
The Basics of a Personal Loan
A standard personal loan is an unsecured loan, repaid in equal monthly installments. According to the United States Chamber of Commerce, there are currently about 21.1 million outstanding personal loans in the U.S..1 With these loans, the loan amounts can range quite a bit, starting at a few hundred dollars up to thousands of dollars. These loans are versatile in spending, so you can use them for almost any expense, including financing a car.
You can find a personal loan with banks, credit unions, or online lenders. Online lenders will provide more flexibility if you have a bad credit score, as financial institutions like banks and credit unions have stricter credit requirements. These loans can be short-term or long-term, ranging from a few months to a few years.
To get a personal loan, you will need to have some income, be able to prove, prove your identity, and be okay with a hard credit check—one that impacts your credit scores.
The Basics of an Auto Loan
An auto loan, also called a car loan, helps finance a new or used car purchase. Many cars and vehicles cost thousands or even hundreds of thousands of dollars, so many people have to finance them.
Auto loans can only be used to purchase a vehicle or refinance an existing financial agreement. Because these loans involve a vehicle, they are considered secured loans, which means that if you cannot repay your car loan, the lender will have the right to repossess the vehicle. Car loans are similar to, but not the same thing as title loans. A title loan is a type of personal loan that uses the car as collateral, but the borrower must own the vehicle outright first. With car loans, borrowers won’t own their vehicle outright until they pay off the loan.
Repayment for these loans will usually be equal monthly payments until the debt is repaid in full.
Auto lenders can include a credit union, bank, car dealership, and private lender. The repayment terms for these loans average three to five years. To get an auto loan, you will need to have reliable income and prove your ability to repay the loan. Additionally, you will have to be okay with a hard credit check.
Can I Use a Personal Loan to Buy a Car?
You may wonder, “Can I use a personal loan to buy a car?” The answer is yes! It’s possible to use this type of funding to get money to purchase a new vehicle. Lenders could provide thousands of dollars in funding with rates that are generally lower than most auto loans. Consider all of your lending options carefully before making a final decision.
The Documents You Will Need for Most Personal and Auto Loans
Because personal and car loans have similar requirements, the documents you will need when applying for them are the same. Here is what you will need to apply for car funding:
A Government-Issued Photo ID
A lender will need to see a valid government-issued photo ID so they can be sure that identity theft is not happening. You can use a driver’s license, state ID, passport, military ID, or permanent resident card.
Proof of Residency
Another essential part of verifying your identity includes verifying your address. To prove your address, you can use documents like pieces of mail, bank statements, utility bills, a mortgage contract, or a lease agreement.
Employment Information and Proof of Income
Lenders will also ask about whether you are employed and the income you make monthly and yearly. While you may be able to finance a car without a job or traditional income, you will need income of some kind. For example, you may still be able to get both a car and a personal loan even if you are a contractor, retired, or live off of passive income sources. To prove your income, you can use documents like bank statements, pay stubs, letters of income, etc.
Sometimes References May Be Asked About
Although this is becoming less common, some lenders may ask for professional references. This can help provide a brief idea of an applicant’s character and ultimately help determine the odds of repaying your debt in full.
Giving Written Consent to Conduct a Hard Credit Check
Submitting an application for funding will require a hard credit check. And before a lender does that, they will need your written permission. A credit check allows lenders to pull your credit reports to view your credit history. Your credit history will have information regarding all your past credit accounts, including payment history, default, and the amount you have paid or still owe. With these details, a lender can decide on approval, the amount you qualify to get, and the interest rate.
Some Key Differences and Similarities Between Personal and Auto Loans
There are definitely differences and similarities between these two loan types, and understanding them can help you learn precisely how these loans work on a detailed level. Here are some things you should know:
Key Differences With a Personal Loan vs. Auto Loan
- Most personal installment loans are usually unsecured, while car loans are secured options.
- Car loans must be used for a vehicle purchase, while a personal loan can be used for all kinds of expenses or significant purchases.
- You will likely need a down payment on your car loan, while personal loans don’t need one.
- The consequences of not paying back your auto loan will involve potentially losing your vehicle (because funding is secured), while with a standard unsecured personal loan, you don’t have to worry about that.
Similarities Between a Personal Loan and Auto Loan
- The interest rate for the loans will be similar—Personal loan rates and average car loan interest rates tend to be in a similar range.
- Poor credit can be okay with these loans as long you have income and find the right lender.
- Car and personal loans typically will have standard loan fees such as an origination fee, interest, and late fees if you pay late.
- These loans can be considered installment loans, as both options are repaid in regular monthly installments.
- You’ll likely find just as many auto loan lenders as personal loan lenders.
- Both funding options will show up on your credit reports as a part of your credit history, and how you make the payments will affect your credit scores.
When Is It Better To Use a Personal Loan vs Auto Loan?
Now that you know the basics about each of these loans, you may be a little closer to figuring out the best option. However, if you are still deciding, below are some tips that will help you make a final lending decision:
Auto Loans Are Usually Best When You Want to Buy a Car
Car loans are usually the best choice if you want to purchase a new or used car, regardless of whether you have bad or excellent credit. There are a few reasons for this, one being that you are likely to find unique financing options from specific dealerships or when purchasing a particular make or model. And because these loans are catered specifically for a car purchase, their repayment terms are better suited for car payment payoff. It may also be easier to track the equity you have in your car with a car loan.
Personal Loans Work Best if You Have Different Expenses
One of the most flexible parts of a personal loan is that you can use it for almost any expense. The most common reasons people take out personal loans are to pay medical-related bills, pay their monthly bills, debt consolidation, finance large purchases, travel, and more. And you can split up how you use a personal loan, so you can take care of multiple expenses.
Steps to Getting a Personal or Auto Loan
If you need funding to purchase a new or used vehicle, then you may wonder what steps you need to take to apply. Below are three simple steps you need to follow to get fast emergency cash for a car purchase.
Check Your Credit Score
Checking your credit score is crucial to do before applying to borrow money. Your credit score will indicate the type of terms you will get. Remember that borrowers with lower credit scores generally get approved for low sums and high interest rates. Knowing your credit rating can help you adjust your search for funding.
Compare Terms and Rates of Lenders
It’s critical to avoid settling for the first offer you get from a lender. Taking time to compare multiple lenders can help you find the best offer for your financial needs. Every lender has different terms, so it’s in your best interest to inquire about rates, fees, and other terms.
Apply for Pre-Approval
Many lenders offer pre-approval decisions for interested borrowers. A preapproval is a conditional approval for funding that allows you to avoid multiple hard credit checks. Lenders conduct soft credit checks to determine if you are eligible for funding based on preliminary information, such as your credit score and income. If you are pre-approved, you can generally expect an estimate of funding.
Additional Information About Personal Loans vs. Auto Loans
| Feature/Aspect | Personal Installment Loans | Car Loans |
| Purpose Flexibility | High flexibility for various expenses. | Primarily for purchasing or refinancing vehicles. |
| Loan Duration | Typically 1 to 7 years. | Typically 3 to 6 years. |
| Collateral | Generally unsecured (no collateral required). | Secured (vehicle services as collateral). |
| Loan Approval Time | Can be as quick as a few hours to a few days. | Varies, but dealership financing can be same-day. |
| Typical Lenders | Banks, credit unions, online lenders. | Banks, credit unions, dealerships. |
| Impact on Credit | Hard inquiry on application, payment history reported. | Hard inquiry on application, payment history reported. |
| Early Repayment Options | Some lenders allow it without penalty. | Some lenders might have prepayment penalties. |
| Loan Amount Range | Typically $1,000 to $50,000 (can vary). | Based on the vehicle price. |
| Special Offers | Some lenders offer rate discounts for autopay. | Dealerships might have promotional offers. |
| Restrictions | Fewer restrictions on usage. | Funds must be used for vehicle-related expenses. |
| Insurance Requirement | Not required. | Comprehensive and collision insurance is often required. |
Factors for Picking the Best Auto or Personal Loan
Whether you are taking out a personal loan or auto loan, there are some things you should pay attention to find the best loan option. Here are some variables to pay attention to:
The Interest Rate of the Loan
The interest on a loan will be the most expensive part of borrowing the money. And so, make sure you get a reasonable interest rate for your specific financial situation. Usually, lenders offer personal loans and auto loans with lower interest rates to applicants with high credit scores. But, even with bad credit, you should still compare different loan rates to find the best deal.
Repayment Length
How long or short a loan is will affect interest and affordability. Make sure you find a loan with a repayment plan that is manageable for your budget, so you don’t end up paying too much in unnecessary interest.
Loan Terms in the Loan Agreement
Your loan terms will give you a good idea of what your repayment will be like and what terms you must follow to abide by the loan contract. Try and find a flexible loan; for example, it has grace periods or flexibility with late payments.
The Loan Amount
You’ll want a loan that covers the entire cost of your expense or purchase. Too little may mean taking on multiple car loans or personal loans, which isn’t the best idea.
The Lender
Before choosing a lender to work with, make sure you do research on them. The last thing you want is to be stuck in a loan with a lender that makes things harder for you than they have to be.
FAQ: Personal Loan vs. Auto Loan
How Do Personal Loans Generally Differ From Other Types of Loans?
Personal loans generally are unsecured, meaning they don’t require collateral, and can be used for a variety of purposes, unlike car loans or mortgages, which are specific to their use.
Are Auto Loan Rates Typically Higher Than Personal Loan Rates?
Auto loan interest rates can sometimes be lower than personal loan rates because they are secured loans, meaning the vehicle serves as collateral. However, the exact rate can vary based on your credit score, the lender, and current market conditions.
Is a Down Payment Always Necessary for a Car Loan, and How Does It Compare to a Personal Loan?
While car loans often require a down payment, the exact amount can vary. Personal loans generally don’t require a down payment as they are disbursed in full upon approval.
Can I Use Personal Loans for Vehicle-Related Expenses Other Than Purchasing a Car?
Yes, personal loans offer flexibility in usage, so you can use them for vehicle repairs, modifications, or even insurance premiums.
How Do Auto Loan Interest Rates Vary for New vs. Used Cars?
Auto loan interest rates for new cars are often lower than for used cars. This is because new cars typically have a higher resale value and are seen as less risky for lenders.
If I Make a Significant Down Payment on an Auto Loan, Can I Expect a Reduction in the Interest Rate?
A larger down payment can reduce the loan amount and might make you a more attractive borrower, potentially leading to better rates. However, other factors like your credit score also play a role.
Are There Any Penalties for Paying off Personal Loans or Car Loans Early?
Some lenders might charge prepayment penalties for paying off the loan before the end of its term. It’s essential to read the loan agreement to understand any such charges.
How Do Unsecured Personal Loans Affect My Credit Score Compared to Auto Loans?
Unsecured personal loans and auto loans both impact your credit score based on your repayment behavior. Timely payments can boost your score, while missed ones can harm it.
Can I Refinance an Auto Loan Like I Can With Personal Loans?
Yes, you can refinance an auto loan to potentially get better rates or terms. However, it’s essential to consider any associated fees and ensure that the new terms are favorable.
What Happens if I Default on My Auto Loan, and How Does It Differ From Defaulting on a Personal Loan?
If you default on an auto loan, the lender has the right to repossess the vehicle since it’s a secured loan. In contrast, personal loans usually don’t have a physical asset tied to them, so while defaulting will negatively impact your credit score, there’s no asset to seize directly.
A Word From CreditNinja About Personal vs. Car Loans
At CreditNinja, we encourage everybody to research lenders and compare multiple offers when looking for both personal or car loans. If you are looking for bad credit loans, you may want to consider installment loans with CreditNinja! We seek to be a more affordable alternative to payday loans or other predatory lending types. Check out our easy online application to see how much cash you may qualify for today!
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