Personal Loan vs. Auto Loan: What’s the Difference?
Written by
Dawn Allcot
Edited by
Melanie Grafil
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
A personal loan puts money into your account, often as quickly as the same business day, for any purpose.
An auto loan is different because it’s a secured loan used exclusively for the purchase of a new or new-to-you, late-model car with relatively low mileage.
Key Differences Between a Personal Loan and Auto LoanÂ
| Feature | Personal Loan | Auto Loan |
|---|---|---|
| Funds received | Direct deposit into your bank account, often the same day | Paid directly to car dealer |
| Interest type | Simple interest, fixed rate | Simple interest, fixed rate |
| Collateral required? | No | Yes, the vehicle |
| Best for | Flexibility and fast funding | Low interest rates on a new car |
| Credit needed | 580 to 660 and up | Varies based on lender |
| Common uses | Paying down debt, vacations, home improvements, large purchases, events like weddings, buying classic or older cars | Buying a car |
What Is a Personal Loan?Â
A personal loan allows you to borrow money and pay it back in monthly payments over a term of one to 10 years, with interest. Sometimes called an installment loan, personal loans are available from banks, credit unions and online lenders.
There are different types of personal loans that can be used for various expenses, including:
- Debt consolidation
- Home improvement
- General expenses like paying for a vacation or wedding
You can also use a personal loan to buy a car, especially if the vehicle is a classic car or a high-mileage vehicle that won’t qualify for traditional auto financing. Â
What Is an Auto Loan?Â
An auto loan is money you borrow for the sole purpose of purchasing a vehicle. The loan amount will include the purchase price of the car — minus any down payment — plus any interest and fees.
You may be able to roll taxes, registration and title costs into the loan or pay them as part of the down payment, depending on your lender.
Paying Back an Auto Loan
You will pay the money back in monthly payments over a term of three to seven years, although some lenders offer auto loans with 10-year terms as the price of new vehicles has risen in recent years.
You can secure an auto loan from a bank, credit union online lender, or the car dealer where you’re purchasing the vehicle.
When you take out an auto loan, your car is typically the collateral for the loan, which can lead to a lower interest rate and easier approval. However, some lenders allow borrowers to take out an unsecured auto loan.
Keep in Mind
If you’re considering secured vs. unsecured auto loans, an unsecured loan may have higher interest rates. However, you aren’t putting your vehicle at risk if you fail to make on-time payments.
How Does a Personal Loan Work?Â
When you’re applying for a personal loan, it’s good to keep the following in mind:
- Check your credit reports and fix any errors that could be driving your credit score down.
- Try to keep your credit utilization as low as possible — ideally 30% or less — when you prepare to apply for the loan.
- Determine how much money you’ll need to borrow. Then, compare rates by getting prequalified through several lenders.
- You might consider checking rates at a bank, a credit union, and an online lender.
- When you’re ready, complete the loan application. You should receive the money in a few days or even less.
- Set up automatic loan payments through your bank. Some lenders will even offer a rate discount if you provide a bank account for monthly direct debits.
How Does an Auto Loan Work?Â
You’ll typically apply for an auto loan after you’ve chosen your vehicle. Take a look at this overview below:
- Calculate your loan amount based on the cost of the vehicle, including any taxes, titles and fees if you are including them in the loan amount.
- Subtract your down payment. A personal loan doesn’t require a down payment.
- Compare auto loan rates with your dealer, your bank, a local credit union and online lenders.
- Lenders will want you to provide the vehicle’s VIN and your auto insurance information, along with all the personal information you’d need to provide for a personal loan.
- Once you’ve found a lender and are approved, the funds will go straight to the car dealer. You’ll make monthly payments to your lender.
Pros and Cons of Each OptionÂ
Let’s explore the pros and cons of a personal loan and a car loan so you can make the best decision for your situation.
Personal Loan ProsÂ
- No collateral required
- No down payment
- Use the money for any purpose
Personal Loan ConsÂ
- Potentially higher interest rates
- May require a good credit score to secure the best rates
- Some personal loans come with application or origination fees
Auto Loan ProsÂ
- May come with an APR as low as 0%
- May be easier to qualify for
- Money paid directly to car dealer
Auto Loan ConsÂ
- Lender holds the title to your vehicle
- May require gap insurance and full collision coverage
- May require a down payment, including taxes, titles and fee
How To Choose the Right Option for YouÂ
| If You… | Go With… |
|---|---|
| Want a fixed monthly payment and clear end date | Auto loan or personal loan |
| Don’t have collateral or assets to secure a loan | Personal loan |
| Have an asset you can use to secure a better rate | Auto loan |
| Want to consolidate multiple debts into one payment | Personal loan |
| Have unpredictable or ongoing expenses (like home repairs) | Personal loan |
How To Apply for a Personal Loan or Auto LoanÂ
The process of applying for a personal loan or auto loan is similar. However, you may need a higher credit score to secure the best rates on a personal loan, since it’s not backed by collateral.
What You’ll Need To Apply
For a Personal Loan:
- Full name and mailing address
- Place of business and annual income
- Social Security number
- Tax returns or recent paystubs
- Employment verification
- Driver’s license or government ID
For an Auto Loan:
In addition to the information above, you’ll need:
- Vehicle identification number (VIN)
- Make, model and mileage
- Proof of insurance for the new vehicle
How Long Does Approval Take?
- Personal loans: It can take anywhere from the same day to a several days, depending on the lender.
- Auto loans: Approval times may vary from a few minutes if at a dealership. In other cases, it may be a week or more, according to SoFi.
Where Can You Apply?
- Personal loans: Banks, credit unions or online lenders
- Auto loans: Banks, credit unions, online lenders or at the dealership where you’re purchasing the vehicle.
Tips To Boost Your Approval Odds
To boost your odds of approval for either a personal loan or an auto loan:
- Ensure you can afford the loan payments — this is a key consideration for lenders.
- Check your credit reports before you apply and fix any errors.
- If you have high-interest debt, try to pay it down.
- Avoid opening any new accounts while you’re preparing to apply for a loan.
FAQs About Personal Loans and Auto Loans
When it comes to personal loan vs. auto loan, the right choice depends on your goals. These FAQs may help guide you to the best decision.- Which one is easier to get: a personal loan or auto loan?
- An auto loan may be easier to get, since it is often a secured loan backed by your vehicle as collateral.
- Does a personal loan or auto loan have lower interest rates?
- Secured auto loans typically have lower interest rates than personal loans. Buyers with excellent credit may even qualify for 0% financing through a car dealer.
- Can I use either a personal loan or auto loan for buying a vehicle?
- Yes, you can use a personal loan or auto loan to buy a car.
- How do they affect credit score?
- Personal loans and auto loans are both installment loans that will affect your credit. Your score will dip when you apply for a loan, and again when you open the new loan account. On-time payments of your car loan or personal loan, over time, will boost your credit score.
- Can I switch from a personal loan to an auto loan, or vice versa, later?
- If you take out an auto loan, you can take out a personal loan to pay off your car loan at a later date if you find you can secure a lower interest rate. However, if you take out a car loan, it can't be used to repay a personal loan — it can only be used to purchase that vehicle.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- SoFi. 2025. "When Is a Car Loan Finalized?"
- Capital One. 2024. "What Credit Score Do You Need for a Personal Loan?"
