These days, it’s common for used cars to cost more than $25,000, so you’ll probably need to finance your purchase before you can jump into your next ride. Still, you might be wondering if it’s better to use an auto loan or a personal loan for your car purchase.
Generally, auto loans are the best choice, but we’ll help you decide if a personal loan makes sense for your unique situation.
Buying a car is exciting but it can also be stressful trying to figure out how to pay for it. You may be wondering if getting a personal loan for a car is a good idea. Personal loans allow you to borrow money for any purpose while car loans are specifically for vehicle purchases. Weighing the pros and cons of each option can help you make the best decision.
At Rocket Loans, we offer competitive rates on personal loans that you can use towards a car purchase. With a quick and easy online application, funds deposited directly to you, and transparent fees, a personal loan may be the right choice to get the wheels you need.
In this article, we’ll compare personal loans versus car loans so you can determine which is the better fit for your situation. Let’s hit the road!
What is a Personal Loan?
A personal loan provides a lump sum of money that you repay in fixed monthly payments over a set period of time. Personal loans can be used for anything – debt consolidation, home improvements, medical expenses, vacations, and more. This includes using a personal loan to buy a car.
Personal loans offer more flexibility since the lender does not place restrictions on how you can use the money. Your credit score determines the interest rate and loan amount you qualify for.
At Rocket Loans, clients with good credit can qualify for personal loans ranging from $2,000 to $45,000 paid back over 3 to 5 years.
Benefits of a Personal Loan for a Car
Using a personal loan for your next car has several advantages:
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Faster financing: With an online lender like Rocket Loans, you can complete the application in minutes and get a lending decision quickly without having to physically visit a bank or dealer.
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Prequalification: Many online lenders allow you to check loan offers by prequalifying or getting preapproved before you find a car to purchase. This gives you a price range for the car you can afford.
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Lower interest rates: Personal loans often have lower interest rates than car loans, especially if you have good or excellent credit. This saves you money over the life of the loan.
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Shorter terms: Personal loans usually have terms of 1 to 5 years. Car loans typically run 3 to 6 years, but can be as long as 7 years. The shorter repayment period helps you save on interest and pay off the car faster.
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Fixed payments: Personal loan payments remain the same each month for the duration of the loan. Car loan payments may vary if you have an adjustable rate loan.
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No prepayment penalties: With a personal loan, you can pay it off early with no penalties. This allows you to become debt-free quicker if you want.
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Use anywhere: Once funded, you can shop any car dealer and negotiate the best price since the loan is not tied to the seller.
What is a Car Loan?
Car loans are a form of financing specifically for vehicle purchases offered by banks, credit unions, and auto dealers. The lender provides the loan amount for the car directly to the dealership, and you make monthly payments towards the auto loan.
Car loans are secured by the vehicle, meaning the lender can repossess it if you default on the loan. The length of the loan term is based on the age and value of the car. New cars may have terms up to 6 or 7 years, while used car loans are 3 to 5 years.
Benefits of a Car Loan
Some perks of using standard car loan financing:
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Dealership incentives: Manufacturers often sponsor low-interest rate offers through their car brand dealers to help sell vehicles. This promotional financing may beat interest rates you can get from a bank.
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Application at dealer: Applying for financing at the car dealership is convenient as they handle the paperwork and loan process for you.
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Loans for older cars: Banks typically don’t finance used cars over 5-6 years old. Dealerships are more likely to approve loans for older vehicles.
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Flexible terms: Car loans allow longer repayment periods beyond what a personal loan offers, which helps lower the monthly payment on more expensive vehicles.
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Guaranteed financing: Many dealerships can get loans approved for buyers with bad credit more easily than a bank.
Should I Get a Personal Loan or Car Loan?
Determining if a personal loan or car loan works better depends on your budget, credit, and needs. Here are some key factors to help you choose:
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Credit score: If you have a good or excellent credit score above 660, you’ll likely get lower interest rates with a personal loan. If your score is fair or bad, a dealer may get a car loan approved when a bank won’t.
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Interest rates: Compare the annual percentage rates (APR) on personal loans you qualify for against any car loan offers. Opt for the lower rate.
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Loan amount: Personal loans have lower maximum limits than car loans, usually topping out around $45,000. If you need to finance a more expensive car, a dealer or bank car loan may be the only option.
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Repayment timeline: A longer car loan term can make payments more affordable but increases total interest paid. Shorter personal loans cost less over time.
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Down payment: Personal loans don’t require a down payment. Car loans typically need 10-20% down to get the best rates.
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New or used car: Personal loans work for both new and used car purchases. Car loans make more sense if you want new car promotions.
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Dealer financing: If the dealership is offering very low-interest financing specials, run the numbers against a personal loan to see which saves more.
Pros of Personal Loans for Cars
- Fast online loan process
- Prequalify to see potential rates
- Fixed monthly payments
- No prepayment penalties
- Shop any dealer with approved financing
Cons of Personal Loans
- Lower maximum loan amounts
- Lender doesn’t negotiate car price
- No long repayment terms
Pros of Car Loans
- Purchase directly at car dealer
- Qualify for new car promotional financing
- Can finance older used vehicles
- Longer terms with lower payments
- May approve lower credit scores
Cons of Car Loans
- Slower loan application process
- Variable rate loans
- Loan secured by car title
- High interest rates with bad credit
How Do I Apply for a Personal Loan?
If you’ve decided a personal loan is the right financing option for your next car, Rocket Loans makes it easy to get started with these simple steps:
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Determine loan amount – Decide how much you need to borrow based on the car price and any down payment. Get prequalified online to see estimated loan offers before shopping.
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Compare loan options – Applying with multiple lenders helps you find the best rates and terms. This takes just minutes to complete online.
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Submit application – After selecting your lender, provide requested information for loan underwriting and verification. Approval may take 1-2 days.
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Accept loan offer – Review your loan offer, e-sign documents online, and accept the loan. The money is quickly sent directly to your bank account.
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Shop for your car – With financing secured, head to the car dealership and negotiate the vehicle price and complete the purchase.
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Make payments – The lender provides a monthly bill to make your personal loan payments. Sign up for auto-pay to conveniently deduct the amount owed from your bank account.
In 3-5 years, you’ll drive away with the car fully paid off! Then it’s all yours with no more loan payments.
Rocket Loans Can Help You Get on the Road
Rocket Loans makes financing your next car simple and convenient with competitive rates on personal auto loans. Our easy online process gives you fast access to funds that can be used at any dealership once approved.
With Rocket Loans, you get:
- Loan amounts from $2,000 to $45,000
- Terms from 3 to 5 years
- Fixed rates as low as 9.116% APR with autopay discount
- No prepayment penalties
- Funds deposited directly to you
- Online applications that take minutes
- No impact to your credit score from checking rates
- Transparent fees
Visit our website or download the Rocket Loans app to see personalized loan options. Complete the quick prequalification process for free with no obligation to get started!
Buying a car is a major purchase. But getting a personal loan for your auto needs doesn’t have to be difficult or expensive. At Rocket Loans, we make financing simple, fast, and affordable. Hit the road with personalized loan options!
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Drawbacks to using a personal loan to buy a car
Even for good-credit borrowers, personal loans tend to have higher interest rates than auto loans. All else being equal, using a personal loan for a car is often more expensive than financing one with an auto loan.
Personal loans usually have shorter repayment periods than auto loans. In early 2023, the average used car loan was 67.6 months long, or a little over five and a half years. In contrast, most personal loans have terms from 12 to 60 months.
Although a shorter loan term means you’ll pay less interest over the life of the loan, your monthly loan payments will be higher. That’s because you’ll have fewer months to spread your repayment across.
Personal loan vs. auto loan: Key differences
At their core, one of the biggest differences between personal loans and auto loans is collateral.
As a type of unsecured loan, personal loans don’t require collateral. With an auto loan, the car serves as the collateral — so if you don’t pay back your auto loan, your lender (also called a lienholder) can repossess your car.
Since they can recoup what you owe through repossession, auto loans are less risky for the lender. As a result, auto loan rates are typically lower than on personal loans.
Below, you’ll find the key differences between personal loans and auto loans:
| Personal loan | Auto loan | |
|---|---|---|
| Loan purpose | Can be used for almost anything | Can only be used to purchase a vehicle |
| APRs | Typically higher (sometimes as high as 36%) | Typically lower (good-credit borrowers can find single-digit rates) |
| Credit score requirements | Harder to qualify for | Easier to qualify for |
| Down payment | Not required | May be required |
| Collateral | Typically not required | Required (vehicle acts as collateral) |
Why Getting a Car Loan Is a Bad Idea
FAQ
Can a personal loan be for a car?
Is it cheaper to get a car loan or personal loan?
What is the cheapest way to borrow money for a car?
Is getting a loan for a car a good idea?
What is an auto personal loan?
An Auto Personal Loan helps you get the money you need to cover your vehicle expenses. You can use one of our Auto Personal Loans to purchase a new vehicle, cover damages from an accident, or pay for new parts to give your automobile a little TLC. Is an Auto Personal Loan the right option for me?
Should you get a car loan or a personal loan?
The choice between a car loan and a personal loan depends on your financial situation and the purpose of the loan.Auto loans are specifically designed for financing new or used vehicle purchases, while
Is a personal loan better than an auto loan?
Funds from a personal loan can be more flexible than funds from an auto loan — they can be used not just for purchasing a car but for the other costs of owning a car as well. Personal loans can be secured or unsecured, with either fixed or variable interest rates.
Can you use a personal loan to finance a new car?
You can use personal loans for almost any type of expense, including financing a new car. Personal loans generally come with higher interest rates than auto loans because personal loans are unsecured vs. secured. While you typically don’t need to make a down payment, your lender may charge an origination fee.