Personal Loan vs. Auto Loan: What's the Difference?

A personal loan is an unsecured loan that can be used to pay for just about any large expense. An auto loan is different because it's a secured loan used exclusively for the purchase of a new or new-to-you vehicle.

If you're looking to finance the purchase of a car, you may be comparing the terms and rates of personal loans and auto loans. Here's what you need to know before you submit your loan application.

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Personal Loan vs. Auto Loan: Quick Take

• Whereas personal loans are usually unsecured, auto loans are almost always secured by the car being financed.

• Because the car serves as collateral for an auto loan, the rate is usually lower than the rate for a personal loan. However, the lender can repossess the car if you fall behind on your payments.

• Consider an auto loan if you have the credit to qualify. Otherwise, you might need a personal loan to buy a car.

• Terms ranging from 24 months to 84 months are available for both loan types.

• Lower rates make auto loans the better choice for most vehicle financing.

Personal Loans vs. Auto Loans: Key Differences

What Is a Personal Loan?

A personal loan allows you to borrow money and pay it back in monthly payments over a term of one to seven years, with interest.

There are different types of personal loans that can be used for nearly any type of expense, including:

• Debt consolidation

• Home improvement

• General expenses like a vacation or wedding

Personal loans are available from banks, credit unions and online lenders. Most are unsecured, which means the lender won't require you to put up an asset in case you can't pay. However, unsecured loans are generally considered riskier, so interest rates can be higher.

What Is an Auto Loan?

An auto loan is money you borrow for the sole purpose of purchasing a vehicle. Rather than receive a lump sum of cash like with a personal loan, auto loan money goes directly to the car dealer.

• The loan amount includes the purchase price of the car — minus your down payment, which many lenders require — 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.

• This loan is considered secured because it uses the financed car as collateral.

• If you're unable to make payments, the lender can repossess your car to protect itself from financial loss. Because of this, auto loans can have lower interest rates than personal loans.

Lenders often restrict the types of vehicles you can finance with an auto loan. Many won’t loan you money for a commercial vehicle, for example, or for a car that’s older than 10 years or that has more than a certain number of miles on it. Cars that lack a clear title are also restricted because the title is what secures the auto loan.

How To Apply for a Personal Loan vs. Auto Loan

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.

How To Apply for a Personal Loan

When you're applying for a personal loan, it's good to keep the following in mind:

1. Check your credit reports and fix any errors that could drive your credit score down.

2. Try to keep your credit utilization as low as possible — ideally 30% or less — when you prepare to apply for the loan.

3. Gather the information and documents you’ll need before you start your application. They include a government-issued photo ID, Social Security number, proof of address and proof of employment and income.

4. Determine how much money you'll need to borrow. Then, compare rates by getting prequalified through several lenders.

5. You might consider checking rates at a bank, a credit union and an online lender.

6. When you're ready, complete the loan application. You could receive instant or near-instant approval.

7. Read the loan offer carefully. If you agree with the terms, follow the lender’s instructions for accepting and finalizing the loan.

8. Provide a bank account number to receive the loan funds. You should have the money in a few days or even less.

9. 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 To Apply for an Auto Loan

You'll typically apply for an auto loan after you've chosen your vehicle. Take a look at this overview below:

1. Calculate your loan amount based on the cost of the vehicle, including any taxes, titles and fees if you're including them in the loan amount.

2. Subtract your down payment.

3. Comparison-shop for auto loans from your car dealer, your bank, a local credit union and online lenders. Request rate quotes from each.

4. Gather the information and documents you’ll need for your application: government-issued photo ID, Social Security number, proof of address and proof of employment and income.

5. Have the vehicle VIN number and your auto insurance information ready when you apply.

6. Complete and submit the loan application. You could be approved the same day.

7. Review the terms of the loan carefully. Follow the lender’s or dealer’s instructions for accepting the loan.

8. Although the loan can take several days to finalize, you might be able to drive the car home as soon as you’ve completed the purchase and loan documents.

Quick Example: Monthly Payment Comparison

The average rate on a new-car loan with a 60-month term is 7.47%, according to the National Credit Union Administration. A typical borrower could pay 15% for a 60-month personal loan.

Here’s a side-by-side look at what each loan type would cost in terms of the monthly payment and total interest paid on a $40,000 loan for a new vehicle:

As you can see, the lower rate on the auto loan, made possible by the fact that it’s a secured loan, saves $150 per month and over $9,000 in total interest over five years.

Pros and Cons of Each

Here’s a look at the pros and cons of a personal loan and a car loan so you can make the best decision for your situation.

Personal Loan Pros and Cons

Auto Loan Pros and Cons

When To Choose a Personal Loan vs. Auto Loan

An auto loan is usually, but not always, the best way to finance a car purchase.

Choose a Personal Loan If

• You don’t have cash to buy a car outright

• You don’t qualify for an auto loan

• You don’t want to risk losing your vehicle if you fall behind on your payments

Choose an Auto Loan If

• You’re comfortable putting the car up for collateral

Additional Costs and Requirements To Know

Financing is just one of several costs and requirements to consider when you’re buying a car.

• Down payment: Auto lenders usually require borrowers to make down payments, even if only by trading in their current vehicles. However, some lenders waive that requirement for well-qualified borrowers.

• Insurance: You’ll have to insure the car before you drive it off the lot. You can contact your insurer while you’re at the dealership.

• Gap coverage: Standard comprehensive and collision insurance covers the car’s depreciated value. If you’re financing most or all of the car’s value, consider adding gap insurance to your policy. It covers the difference between the depreciated value and the amount you’re financing.

• Fees: Watch out for delivery fees, pre-delivery preparation and inspection fees and advertising fees. Consumer Reports recommends contesting them if they appear on your invoice.

• Taxes and titling: You’ll have to pay any taxes due on your purchase in addition to the cost of transferring title to your name. You can usually roll these costs into the loan, but watch for steep mark-ups if you’re using dealer financing.

FAQs

Learn more about financing your auto purchase with these frequently asked questions.

Which is easier to qualify for?

An auto loan may be easier to get since it's often a secured loan backed by your vehicle as collateral.

Can I use a personal loan to buy a car?

In most cases, yes.

What credit score do I need?

Every lender has its own requirements, but you’ll need a FICO score of at least 670 or a VantageScore of at least 661 to qualify for competitive rates. You can be approved for high-interest loans with lower scores.

Can I buy an older or private-party car?

Yes, you can buy an older or private-party car with a personal loan. Some auto lenders also allow private-party purchases, subject to limits on age/mileage.

Do I need a down payment?

Not always. Lenders sometimes allow 100% financing for well-qualified borrowers.

Can I refinance later?

Yes, but the requirements vary by lender. Check your loan documents to see how long you need to wait.

How fast can I get funding?

You can get funding as soon as the same day.

Sources

• National Credit Union Administration. 2025. "Credit Union and Bank Rates 2025 Q3."

• Consumer Reports. 2026. "How to Spot and Avoid Unnecessary Car-Buying Fees."

Dawn Allcot contributed to the reporting for this article.

Photo credit: Prostock-Studio / iStock.com