If you’re shopping for a car and can’t pay all cash, you’ll need to explore financing options. An auto loan is the most popular choice, but don’t overlook a personal loan as a potential way to purchase your next vehicle.
An auto loan can only be used to buy a vehicle, whereas a personal loan can be used for almost anything. The differences don’t end there: Collateral, interest rates, flexibility in the purchase and risk are all things to consider before you sign any loan. If you’re trying to decide between the two, here are pros, cons and other considerations.
- Auto loans typically offer lower interest rates than personal loans because the vehicle serves as collateral, but that also means the lender can repossess your car if you default.
- Personal loans are generally unsecured, so your credit score and income determine whether you qualify. Borrowers with strong credit may be able to borrow up to $100,000.
- Auto loan terms typically range from 48 – 72 months, though some lenders may offer longer terms. Personal loan terms generally run 12 – 84 months.
- If you’re buying an older or high-mileage vehicle, or purchasing from a private seller, a personal loan may be your only financing option.
- Down payments are standard with dealer auto loans but are rarely required for personal loans.
Auto Loan Vs. Personal Loan: Key Differences
Making a decision about the kind of loan you want to use to buy a vehicle takes time and careful consideration.
When you use an auto loan, the vehicle must usually be less than 10 years old. Auto loans work well for new cars, but if you want to buy a car directly from an individual or at an auction, a personal loan may be easier to get, and there are few limits on what you can use it for.
Auto Loan
An auto loan can be used only to buy a qualifying vehicle, which, in turn, secures this collateral-based loan. Along with your credit and income, your car’s specific make, model, age and condition can affect how much you can borrow, the terms and interest rate of the loan.
Some banks and credit unions allow you to use a loan to buy an older vehicle, but guidelines vary by lender type.
Auto Loan Lenders
You can get an auto loan from a bank, car dealership, credit union or an online lender. Auto loans typically have lower interest rates than personal loans. This is because the loan is secured by the vehicle and the lender holds the title until you’ve paid it off. The average term of an auto loan is usually 48 – 72 months, but you may be able to negotiate a longer term. The downside with a longer term is you’ll pay more interest overall.
If you buy a car from a dealership, you’ll likely need to make a down payment on a car loan. How much you’ll pay will depend on the dealer and the car. Sometimes, dealers offer 0% down on new vehicles. Chances are, your interest rate will be lower if you can put at least 20% down on a new car and 10% down on a used vehicle. Trading in a vehicle will lower your loan amount.
Auto loans are secured by the car, acting as collateral. If you can’t repay your loan, the lender can seize it through repossession. You don’t have the same risk when you use a personal loan.
Personal Loan
Personal loans are generally unsecured loans not backed by an asset. That means your credit score and income determine whether you qualify. You may be able to borrow up to $100,000 with a personal loan, depending on your credit and other financial factors. Loan terms range from 12 – 84 months.
Personal Loan Lenders
You can get a personal loan from an online lender, bank or credit union. These unsecured loans generally have higher interest rates than auto loans because there is no collateral. But you can use them for mostly anything, and if you’re planning on buying a car with one, you can apply the loan proceeds toward the vehicle cost and other needs.
A personal loan can be used for a variety of purposes, but it is more commonly used for debt consolidation, home repairs and renovations or paying for education.
Auto Loan Vs. Personal Loan Comparison: At A Glance
| Auto Loan | Personal Loan | |
|---|---|---|
| Interest Rate | Lower (averaging 7% APR for new; 10.6% APR for used*) | Higher (averaging 11.40% APR)** |
| Collateral | The vehicle | None |
| What You Can Buy | Qualifying vehicles | Nearly anything |
| If You Default | The vehicle can be repossessed | Credit damage |
| Repayment Terms | Typically up to 72 months but can go up to 84 months | 12 – 84 months |
| Down Payment | Standard at dealerships | Rare for personal loans |
| Approval Requirements | Credit, income, debt-to-income ratio and the vehicle, including its age and mileage | Credit, income and debt-to-income ratio |
** Source: Federal Reserve data as of February 2026
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Pros And Cons Of Auto Loans
Pros
- They usually have lower interest rates because the vehicle secures the loan.
- You can borrow larger amounts for high-priced vehicles if you qualify.
- Longer repayment terms keep monthly payments manageable.
- Most auto loans are easier to qualify for with average credit scores.
- You can buy your car and apply for financing at a dealership, or you can go through a bank or credit union.
Cons
- There are typically vehicle restrictions based on age and mileage.
- A down payment is typically required by a dealer.
- You could lose your car and damage your credit if you can’t pay back the loan.
- Cars depreciate the moment you drive them off the lot. If you borrow too much for an overpriced car, it could soon be worth considerably less than you paid for it.
- If you have an active auto loan, you may need to settle the outstanding balance. Typically, the easiest way to do this is by trading it in to a dealer or selling the car directly to a dealer.
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Pros And Cons Of Personal Loans
Pros
- There is no collateral required, so the car isn’t at risk if you miss a payment.
- You can use the money to buy any type of vehicle from any seller, including private sellers.
- Personal loans don’t generally require a down payment.
- It’s easier to sell or trade the car since there’s no lien on it.
Cons
- These may have higher interest rates than auto loans, and qualification is based on your credit profile and income.
- You may be charged an origination fee, usually a percentage of what you borrowed.
- You’ll need a stronger credit score to qualify for competitive rates.
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When To Use An Auto Loan Vs. A Personal Loan
In most cases, an auto loan is a better option, but there are some valid reasons to choose a personal loan instead. When you’re trying to decide, consider asking yourself the following questions:
- Is this a qualifying vehicle from a private seller or a dealership?
- Do I need extra money for anything besides the car itself?
- How much does the lower interest rate matter to me?
- Can I afford a down payment?
Consider An Auto Loan When…
- You want to buy a newer vehicle from a dealership.
- The vehicle meets all requirements, like being under 10 years old.
- You want a low interest rate; even with fair credit, auto loans typically have lower rates than personal loans.
- You can make regular payments on the loan and you can afford a down payment.
Consider A Personal Loan When…
- You want to buy a vehicle from a private seller.
- You want to buy an older or high-mileage vehicle that won’t qualify for an auto loan.
- You need money for repairs and restorations to the car you own.
- You need money to cover other vehicle-related costs.
- You don’t want to put down collateral or make a down payment.
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How To Apply For An Auto Loan
If you want to apply for an auto loan, here’s how the process works.
- Estimate how much you can spend on a car. Kelley Blue Book offers an online calculator you can use to figure out how much your auto loan will cost. When you’re making a budget, include the extra costs, like car insurance and routine maintenance, not just the total purchase price.
- Apply with a bank, credit union or online lender before heading to the dealership. If you have a preapproval letter, you can use that to negotiate dealer financing.
- Know that multiple auto loan inquiries within 14 – 45 days may count as a single hard pull on your credit, so don’t be afraid to compare several lenders. It will likely drop your score by no more than five points, and you can improve it over time.
- Make sure your vehicle meets the car’s age, mileage and title requirements; otherwise, your preapproval may not apply. Preapproval on an auto loan is usually good for 30 – 40 days.
- Review the loan’s APR, term length, total interest, fees and any add-ons (extended warranties, gap insurance or upgrades) in your contract before signing. If you are financing and buying directly from a dealer, know that it isn’t uncommon for them to tempt you with add-ons, such as extended warranties and other amenities that will push your loan amount higher.
How To Apply For A Personal Loan
- Make sure your credit score is strong to get the best rates. Personal loans are unsecured, so lenders lean heavily on your credit score and debt-to-income ratio. The stronger both are, the better your rate will be.
- Most online personal loan lenders let you check estimated rates with a soft credit pull, which won’t harm your credit. Shop around to get an idea of what you qualify for.
- Bring a government-issued ID, proof of income (pay stubs, tax returns or bank statements) and proof of address to apply.
- Be prepared for a hard credit pull, which could drop your score by about five points. The upside is that some online lenders will approve your loan in a few minutes.
- The money can land in your bank account within a few minutes, hours or business days (depending on the lender). Then you can pay the seller directly by check or cash, which can be useful if you’re purchasing from a private seller.
The Bottom Line: Auto Loans Are Cheaper And Personal Loans Are More Flexible
Should you use an auto loan or a personal loan? It comes down to the specifics of the vehicle and the type of seller, as well as the type of loan you can qualify for. Run the numbers on both options before committing, and choose the loan that works best for you. Don’t let a salesperson rush your decision; it’s worth taking your time to shop lenders, rates and vehicles.
Thinking of buying a new or used vehicle? Learn more about personal loan options to find financing for your new ride.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
