Personal Loan vs Car Loan Interest Rates: Which Is Better for Financing Your Vehicle?

When it comes time to purchase a new or used car, you’ll likely need to finance the vehicle unless you have tens of thousands of dollars readily available. Two common financing options are personal loans and car loans. Both allow you to spread out the cost over time, but they differ significantly when it comes to interest rates. This article will compare personal loan vs car loan interest rates to help you determine which is the more affordable option for financing a car.

Overview of Personal Loans and Car Loans

A personal loan is an unsecured loan that can be used for any purpose. You receive a lump sum of cash upfront and repay it in fixed monthly installments over a set repayment term, usually 2 to 7 years. The interest rates on personal loans range from around 3% to 36% depending on your credit score and other factors. The higher rates account for the increased risk lenders take on with unsecured financing.

Car loans, on the other hand, are a form of secured financing specifically for vehicle purchases. The car itself serves as collateral for the loan, meaning the lender can repossess it if you default. This reduces the lender’s risk, allowing them to offer lower interest rates. New car loans generally have interest rates between 3% and 20%, while used car loans are usually 8% to 20%.

Personal Loan Interest Rates

Personal loan interest rates can vary quite a bit from lender to lender and are primarily based on your credit score and history. Here are some average rate ranges you can expect with different credit profiles:

• Excellent credit (720+ score): 3% to 12%
• Good credit (680-719 score): 10% to 20%
• Fair credit (640-679 score): 15% to 25%
• Poor credit (below 640 score): 25% to 36%

In addition to your credit, other factors like your income, existing debt levels, and the loan term length can impact your rate Those with the best profiles can qualify for rates around 5% or less, while borrowers with poor credit may pay up to 36%.

Personal loan lenders determine your rate upfront when you apply and lock it in for the entire repayment period. Your interest rate will remain fixed even as market rates fluctuate over time.

Car Loan Interest Rates

For car loans your interest rate will depend on the following

• New vs. used vehicle – New cars get better rates
• Your credit score – 700+ scores get the lowest rates
• Down payment amount – Larger down payments mean lower rates
• Loan term – Shorter terms have lower rates

Here are some average car loan rate ranges broken down further by new vs used status:

New Car Interest Rates

• Excellent credit (720+ score): 3% to 7%
• Good credit (680-719 score): 4% to 10%
• Fair credit (640-679 score): 8% to 15%
• Poor credit (below 640 score): 10% to 20%

Used Car Interest Rates

• Excellent credit (720+ score): 4% to 10%
• Good credit (680-719 score): 6% to 12%
• Fair credit (640-679 score): 10% to 18%
• Poor credit (below 640 score): 12% to 20%

As you can see, used car loans come with interest rates around 2 percentage points higher on average compared to new cars. This accounts for the increased risk with financing older, high-mileage vehicles.

One unique difference between car loans and personal loans is that car loans often have variable interest rates. This means your initial rate is only locked for a short period, such as 60 days. After that, your rate can fluctuate up or down based on an index like the prime rate.

Comparing Interest Rates: Personal vs. Car Loans

When deciding between a personal loan or car loan, the interest rates can make a significant impact on your total repayment costs. Let’s compare average rate scenarios for each loan type:

• Excellent credit borrower taking a $20,000, 5-year personal loan at 10% interest
• Excellent credit borrower taking a $20,000, 5-year used car loan at 8% interest

With the personal loan’s higher 10% rate, the monthly payment would be $424 and you’d pay $5,084 in total interest over the loan term.

The used car loan has a lower 8% interest rate, making the monthly payment just $377 with $4,253 in total interest.

By going with the lower-rate car loan, this borrower would save $831 in interest and have a more affordable monthly payment.

For those with good or fair credit, the interest savings may be even more substantial when choosing a car loan over a personal loan. However, borrowers with poor credit may find their personal loan and car loan rate quotes are similar, negating much of the interest savings benefit.

When a Personal Loan May Beat a Car Loan on Rate

While car loans generally offer better interest rates, here are a few scenarios where a personal loan could be cheaper:

• You have an excellent credit score of 720+ – Top-tier personal loan borrowers can sometimes find rates comparable to or beating used car loan averages.
• Large down payment – Putting down 20% or more on a car loan can secure you the lowest rates possible. With a personal loan, you may get close to that rate without a down payment.
• Older used car – Personal loans let you buy any car, but older used models may not qualify for financing or will have high car loan rates.
• Shorter term loan – Personal loans as short as 2 years can have lower rates than even 5-year car loans.

It’s wise to check rates from multiple personal loan and auto loan lenders before applying. This allows you to find and confirm the most affordable financing option for your specific situation. Pre-qualification tools let you check rates without a hard credit inquiry.

Other Factors to Consider

Beyond just interest rates, a few other considerations come into play when weighing personal loans and car loans:

• Loan amounts – Personal loans often max out at $40,000, whereas car loans can finance up to $100,000 in some cases.
• Credit requirements – Car loans may have more flexible credit requirements, allowing those with fair or poor credit to qualify.
• Down payment – Car loans typically require 10% to 20% down, but personal loans need no down payment in most cases.
• Fees – Both loans can charge origination fees, but car loans tend to have lower fees around 1% to 2% of the loan amount.
• Prepayment penalties – Personal loans don’t have prepayment penalties if you pay off the balance early, but some car loans charge fees for early payoff.

Looking at the full picture using these other factors can help guide you to the right financing decision.

Which Loan Is Better for You?

When it comes to figuring out whether to get a personal loan or car loan, interest rates are a major piece of the puzzle. For most borrowers, especially those with good credit, the lower rates of a car loan make it the more affordable financing option. However, don’t forget to factor in other elements like fees, credit requirements, and down payments as well.

Thoroughly researching options from multiple lenders can ensure you find the right loan for your needs at the lowest possible rates. Be sure to compare both personal loan and car loan interest rates and terms before committing to either type of financing. With some effort, you can secure affordable financing that fits comfortably within your budget.