Which is better: an auto loan or a personal loan?
In general, auto loans are often the better way to finance a vehicle purchase since they can offer lower APRs, which can lead to lower costs overall. Still, there are times when a personal loan can make sense.
When deciding whether to use a personal or auto loan for your car purchase, there are a few factors to consider.
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Auto loan
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Personal loan
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Loan amounts
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May range up to $100,000
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May range up to $100,000
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APRs
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Typically fixed; can be higher for used cars
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Typically fixed; the type of car doesn’t impact rates
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Terms
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Typically 2 to 8 years
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Typically up to 7 years
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Collateral
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Yes — secured by the vehicle
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Not typically required
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Down payment
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Typically required
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Not required
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Origination fee
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Typically rolled into your loan APR
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If required, it’s typically deducted from your loan proceeds
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Auto loan vs. personal loan: example costs
Let’s say you want to purchase a $20,000 used vehicle. Here’s what those costs could look like with either a personal or auto loan, assuming a 5-year repayment term:
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Auto loan
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Personal loan
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APR
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6%
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9%
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Down payment
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$2,000
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N/A
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Monthly payment
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$347.99
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$415.17
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Total interest
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$2,879.43
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$4,910.03
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Total cost
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$20,879.43
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$24,910.03
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Keep in mind that this example excludes sales taxes, which can increase your total costs.
When an auto loan makes sense
For most people who are purchasing a new or used car from a car dealership, an auto loan may be the best option.
Depending on your auto loan terms, you may be able to save on interest and lower your monthly payment. If you can put together a sizable down payment, your payments may be even lower. Typically, experts advise putting down at least 10% of the vehicle cost for used cars or 20% for new cars. Lenders may even require a down payment. Higher down payments can also reduce the chances that you’ll end up owing more than the car is worth, after depreciation.
Still, it’s important to consider the pros and cons of auto loans.
Pros and cons of auto loans
Pros
- Can offer lower APRs: Auto loan APRs can be lower than comparable personal loans since they’re secured by the car, which helps reduce the risk taken on by the lender
- May offer slightly longer repayment terms: Depending on the lender, you may be able to get a longer repayment term than a personal loan, which could help lower your monthly costs
- Can give you access to special financing offers: Dealerships may offer access to promotions, such as a low intro APR, for qualified borrowers
Cons
- Missing payments could mean losing the car: Since auto loans are secured by the car, missed payments can lead to both credit score damage and vehicle repossession
- Not available for all vehicle purchases: Lenders typically only allow you to use an auto loan when purchasing from car dealers, and you typically can’t use them for classic cars
- May charge a prepayment penalty: You may be charged a fee if you want to pay off your loan ahead of schedule
How to get an auto loan
If you decide an auto loan makes sense for you and you’ve picked a car to purchase, there are several key steps to get a car loan:
- Check your credit score: Although auto loans are secured, lenders will still check your credit to help ensure that you’re likely to make the payments. The higher your credit score, the more likely it is that you’ll qualify for better loan terms.
- Shop around: Each lender will offer its own terms and qualification requirements. Exploring those offerings can help you choose a lender that works for you.
- Use pre-qualification or pre-approval: Pre-qualification can help give you an idea of the types of loan terms you may be likely to qualify for. Pre-approval takes that a step further, giving you conditional approval for certain terms and typically locking in the rate for up to 60 days.
- Consider any dealership loan offer: The dealership you visit may have their own loan offerings, including special financing, which may be worth considering. You can weigh those costs and terms against your pre-qualification terms to find the best option.
- Apply: Lenders will typically require you to provide documents verifying your identity (such as a government-issued ID), income (such as a pay stub or tax return) and address (such as a utility bill). You may also need to provide proof of purchase and insurance.
- Accept and sign your loan documents: If you like your terms, you can sign any necessary loan documents to make it official.
When to choose a personal loan
If you’re looking to buy a car but you don’t have a down payment, you want to purchase a car that doesn’t qualify for an auto loan (such as an older or classic car) or you want to purchase from a private seller, a personal loan could be the better option.
It may also make sense if you want to use the funds for more than simply the car purchase. For example, you might want to use the loan to pay for:
- Car maintenance
- Storage
- Insurance costs
- General use costs (gas, cleaning supplies, etc.)
You can use personal loans for many types of expenses. However, keep in mind that some lenders have restrictions on how the funds can be used, so be sure to research your options.
Pros and cons of personal loans
Pros
- No down payment required: You don’t need to save for a down payment to qualify for a personal loan
- Can be used for private seller purchases: Personal loan lenders don’t typically have requirements around who you buy from or the type of vehicle you purchase
- Allows you to use funds for other car-related costs, like upkeep: Funds are flexible, so you may use them for both the car itself as well as other costs, if desired
- Can be fee-free: Some lenders, including Citi, let you avoid loan fees altogether
Cons
- Typically have higher APRs than auto loans: You may end up paying more in interest long-term due to the higher APRs that personal loans offer
- Missed payments can damage your credit: Lenders typically report your payments to the credit bureaus, so missed payments can lower your credit score (and, if left unpaid long enough, the lender may send the debt to collections)
- May be more difficult to qualify for: Since personal loans are typically unsecured, qualifying depends entirely on your creditworthiness
How to get a personal loan
If you decide to take out a personal loan for your vehicle purchase, there are a few steps that can help you access funding:
- Check your credit: Your credit score is a key factor in qualifying for a personal loan, so it’s important to understand where you stand before applying. The higher your score, the better the terms you may be able to qualify for.
- Factor in any origination fee: If you choose a lender that charges an origination fee, that amount will typically be deducted from your loan amount. That means you may need to borrow more to cover your purchase cost.
- Use pre-qualification: Many personal loan lenders offer pre-qualification, which can help you understand potential loan terms without harming your credit. While not a guarantee of your terms, they can help you narrow down your options.
- Apply: Lenders typically require documents that prove your identity (such as a government-issued ID), income (such as tax returns, pay stubs, bank statements or W2s) and contact information, such as your address and phone number
- Sign your documents: If you agree with the loan terms your chosen lender offers, you can sign the loan documents to receive your funds
Citi offers flexible, fee-free personal loans to qualified applicants. If you think you could benefit from a Citi® Personal Loan, apply online today.
Auto loan vs. personal loan: FAQs
Can you use a personal loan to buy a car?
Yes. However, in most cases, an auto loan is the better option since they can offer lower APRs.
What’s the difference between a personal loan and an auto loan?
A personal loan is typically an unsecured loan that offers flexible financing that you can use for a wide variety of purposes, including purchasing a car. An auto loan is specifically designed for car purchases, may require a down payment and may give you access to special financing offers.
Which interest rate is better, car loan or personal loan?
Auto loans typically offer lower APRs than personal loans because they’re secured by the vehicle. Personal loans, by contrast, are typically unsecured, so APRs may be higher. Either way, it’s important to shop around for the best rates.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
