Personal Loans are different from. Car Loans
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Personal Loans in comparison to. Car Loans: What's the Difference?

How they work and the pros and cons of each
By Christina Majaski
Updated May 02, 2022.
Reviewed by Thomas Brock
Personal Loans vs. Car Loans: A Comprehensive Analysis

If you're looking to purchase a large purchase such as an automobile, you might be required to get a loan to cover the cost. Personal loans and auto loans represent two popular finance options. If you can meet their lending requirements, they can be relatively easy to obtain.

What's the difference between the two? The personal loan could be utilized for various purposes, including buying cars, while an auto loan (as it's name implies) is only used to purchase an automobile. Every loan type has its particular pros and cons, so it is important to evaluate and contrast them prior to signing on the"dotted line.
Key Takeaways

A personal loan can be used for many different purposes while a car loan is only to purchase an automobile.
A personal loan can be secured by something that is valuable, or, typically, unsecured.
Car loan is secured against the vehicle you intend to purchase. This means the vehicle serves as collateral for the loan.
In either case, good credit typically means it's much easier to get approval and to be offered better loan terms.

Personal Loans compare to. Car Loans

Investopedia / Sabrina Jiang
Personal Loan

A personal loan can provide the borrower with the funds of an institution that lends money (generally a bank), in one lump sum, which the borrower is able to use at their discretion, such as for the occasion of a wedding, vacation or for home improvements.

A personal loan can be secured by something worth something, like the home or vehicle which allows the lender to seize your property to pay back its losses if you don't repay the loan. However, most people opt for an unsecured loan meaning that the loan is made without collateral.

Two major elements that influence the amount you pay for the loan include the rate of interest and the loan term. The personal loan calculator is an excellent tool to figure out what these elements will impact the amount you pay each month.
Interest Rates

Most often generally speaking, generally, unsecured loans generally have higher interest rates than similar secured loans with collateral. Personal loans also come with much more stringent approval requirements, so you'll want an excellent credit score. If your credit score isn't in good health the personal loan may not be an option.

Your credit score will affect both the loan amount as well as the interest rate, which may be fixed or variable. The higher your credit score, the higher your capacity to borrow, and the lower your interest rate. In contrast, the lower your credit score, the lower your borrowing capacity , and the higher the rate.1
Pros

There are no limitations on how funds are spent

Flexible payment structure (short and long-term)

Cons

Interest rates expected to be on the higher side

Tougher lending requirements

Consumers with poor credit scores won't qualify



The Terms

Personal loans come with a predetermined repayment period, stated in terms of months: 12 months, 24 36, 36, etc. Longer loan terms can lower your monthly repayment, but you'll have to pay more in interest over the course of the loan. On the other hand, shorter loan terms result in more monthly repayments but pay less overall interest, because you're paying off the principal faster.

Most lenders take online application for personal loans and you can often be approved for an auto loan on the spot at the dealership.
Car Loan

A car loan is secured against the vehicle you are planning to purchase, meaning the vehicle serves as collateral to the loan. If you do not make your repayments the lender has the right to seize the auto. It is a loan is paid back in fixed installments throughout the duration of the loan. Much like a mortgage, the lender is still in control of the asset until you make the final payment.

In order to determine what the interest rates and loan term would best suit your requirements prior to heading to the dealer, think about experimenting with an auto loan calculator first.
Interest Rates

Given that the lender has financial control over the vehicle--a secured loan--the debt is deemed a lower risk that generally results in an extremely low interest rate for the lender. Interest rates are also fixed, meaning that the borrower is not subject to the rate increases that could be associated with unsecured personal loans.
Pros

Usually a lower interest rate

Easy to get with poor credit score

It is often a practical "on the on the spot" option for financing

Cons

You don't have title to the vehicle until final repayment is completed

A down payment upfront is usually required to guarantee the loan

The Terms

Most car loans are fixed at 36,48, 60, or 72 months. And just like the personal loan the shorter the loan term, the higher the monthly payment and vice versa. A less-than-average credit history won't necessarily hinder you from getting your car loan (unlike a private loan). Also, it will have less influence on the interest rate or borrowing amount, which is dictated by the price of the car.2

There are many ways to qualify for auto loans. Before signing for an auto dealer loan, it can be worthwhile looking into whether a local credit union or bank will offer you an even better deal.3
Special Considerations

Regardless of whether you choose the personal loan and a auto loan, rates and deals differ between lenders. So do your homework and compare offers to find the most competitive rate. Look into credit unions, banks, and various lending institutions to find the best mix of rates of interest and loan lengths for an affordable monthly payment.
The Bottom Line

When it comes time to purchase a new car, many people will prefer a dealer-financed auto loan since it's fast and simple. In some instances it may be more efficient to get an individual loan instead. In order to make an educated choice, start by asking you these inquiries:

Are I in possession of collateral with that I can use to ensure the loan?
What rate of interest (and the associated payments) can I really manage to
Do I have my credit in good shape?

Deciding between the two is a matter of weighing the advantages and disadvantages in light of your particular circumstance.
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Personal Loan Guide to Personal Loans

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What Is a Payday Loan? How It Works, How to Get One and also the legality
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Can Personal Loans Be Included in Bankruptcy?
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Can personal loans be transferred to a different person?
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How personal loans affect your Credit Score
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What Is an Amortization Schedule? How to Calculate With Formula
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Personal Loan Interest Rates How is a personal loan Calculated
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How do I apply for a Personal Loan
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Best Personal Loans
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Best Small Personal Loans
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Best Bank Loans
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Best Peer-to-Peer Lending
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Best Online Personal Loans
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The Best loans for people with bad Credit
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Signature Loan
A signature loan is a personal loan provided by banks and other finance companies that depends solely on the signature of the borrower and guarantee to pay the loan as collateral.
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