Personal Loans vs Auto Loans: Which is Better for You?

Getting a big chunk of cash to cover a major purchase or expense isn’t always easy. When you need to finance $10,000, $20,000 or even more, two common options are personal loans and auto loans. But which one is the smarter choice for you? Here’s a detailed look at how these two major lending products compare.

An Overview of Personal Loans and Auto Loans

A personal loan is an installment loan that can be used for almost anything – debt consolidation home remodeling, medical expenses and more. Auto loans specifically finance the purchase of a car, either new or used.

With a personal loan, the loan amount, interest rate, and repayment term are set when you borrow. You’ll receive the lump sum upfront and make fixed monthly payments over 2 to 7 years to repay the loan plus interest. Your creditworthiness determines the loan terms you can qualify for.

Auto loans work similarly. The loan amount is for the car’s purchase price. The interest rate and repayment term are fixed when you get the loan, usually for 2 to 6 years. The key difference is auto loans are secured by the vehicle, meaning the lender can repossess it if you default.

Primary Differences Between Personal and Auto Loans

While personal loans and auto loans share similarities they have some key differences

• Purpose – Personal loans can be used for any purpose. Auto loans only fund a car purchase.

• Collateral – Personal loans are unsecured. Auto loans are secured by your car.

• Interest rates – Personal loans tend to have higher interest rates, often in the 10-36% range, since they are unsecured. Auto loans are lower, often 5-20%, due to the collateral.

• Loan amounts – Personal loans range from $1,000 to $100,000. Auto loans are often $5,000 to $50,000 but can be up to $100,000.

• Qualification – Personal loans rely on your credit score and income. Auto loans consider these plus the vehicle value.

• Prepayment penalties – Personal loans rarely have prepayment penalties. Auto loans sometimes do.

When Should You Get a Personal Loan vs an Auto Loan?

In most cases, an auto loan is the better option for financing a car purchase. The lower interest rates save you significant money compared to an unsecured personal loan.

However, there are some situations where a personal loan could make sense for a car:

• You need a small loan under $5,000 – minimum auto loan amounts are often higher.

• You have bad credit – lenders may offer higher loan amounts with a personal loan.

• You don’t want a lien on your car title – personal loans don’t put a lien.

• You need cash fast without shopping for a car first.

• You want to borrow against the equity in your paid-off car.

For any purpose other than a car, a personal loan is the way to go. Only use personal loans for car purchases as a last resort if you can’t qualify for auto loan financing.

Comparing Personal Loan Lenders

With personal loans, it pays to shop around among multiple lenders to get the best rate. Online lenders tend to offer the lowest rates and fastest approvals. Here are a few top companies to check first:

• SoFi – Competitive rates from 6.74% to 21.61%. Loan amounts $5,000 to $100,000. Benefits include unemployment protection.

• Upstart – Uses alternative underwriting for credit scores below 700. Rates 7.69% to 35.99%. Loans up to $50,000.

• LendingClub – Long-running pioneer in online lending. Offers personal loans up to $40,000 with rates from 8.05% to 28.99%.

• Prosper – Peer-to-peer lending platform with personal loans up to $40,000 and rates from 6.95% to 35.99%

Comparing Auto Loan Lenders

You can get pre-approved for financing from a bank, credit union, or online auto lender before visiting dealerships. This allows you to focus on negotiating the vehicle price.

Here are some top options for auto loan preapproval:

• Capital One – Prequalify online with rates from 4.25% to 24.99%. Loans up to $50,000.

• PenFed Credit Union – Get preapproved for 1.79% to 18.00% APR on auto loans.

• Lightstream – Offers auto loan refinancing along with purchase financing. Rates as low as 2.49%.

• Bank of America – Preview personalized rates from participating dealers online.

6 Tips for Getting the Best Loan Terms

Follow these tips when applying for a personal loan or auto loan to get the lowest rate possible:

• Check your credit – Good credit (690+ score) qualifies you for the lowest rates. Review your credit reports and fix any errors before applying.

• Compare loan options – Getting multiple rate quotes will help you find the best loan terms and lender. Avoid settling on the first offer.

• Lower your debt – Lenders view your credit utilization ratio (debt balances versus limits) when making loan offers. Paying down existing debts can help improve this ratio.

• Ask about discounts – Many lenders offer interest rate discounts for autopay, loyalty, and other reasons. Don’t forget to ask!

• Make a down payment – Putting 10% or 20% down reduces the amount you have to finance and can help you qualify for better rates.

• Opt for shorter terms – Pick the shortest term you’re comfortable with. Long repayment terms cost more in interest over the life of the loan.

Which Loan Is Right for You?

When it comes to personal loans versus auto loans, weigh your specific needs. An auto loan is best for financing a car, while a personal loan works for any other borrowing needs. Shop around among multiple lenders to get the most competitive interest rates and terms. With good credit and smart borrowing tactics, you can get the funding you need at the lowest cost.