At a Glance

When looking for a new loan, you’ve likely to come across a myriad of options. Two of the most common types of loans offered are personal loans and auto loans which, on the surface, can seem quite similar. However, breaking down the differences between these loan types is crucial for making the right borrowing decision.

What is a personal loan?

A personal loan is a type of loan that is offered by a bank, credit union, online lender, and other borrowers. This loan can be secured or unsecured, though it is typically the latter, and has a multi-use purpose. The terms on a personal loan are usually fixed and have term lengths of around 12-84 months on average.

Most personal loans have a principal value ranging from $1,000-$100,000 depending on the purpose they are needed for. These loans can be used for medical bills, large home renovations, weddings, financial emergencies, and much more.

Learn more: What is a Personal Loan? | Credello

Requirements of a personal loan

Applying for a personal loan is relatively easy and you won’t need to gather a large amount of information to complete the process. Here’s what is required:

  • A filled out loan application: You will need to list what the purpose of the loan is for, the amount you are requesting, and other pertinent information.
  • Identification: You will need to provide a government issued form of identification to verify you are who you say you are.
  • Income verification: Part of the loan approval process involves looking at your streams of income to determine if you can repay the loan. Due to this, you will need to provide proof of income and employment.
  • Proof of address: Finally, you will need to provide verification of your permanent address.

In addition to the above information, you will also need to have a qualifying credit score for the lender you wish to borrow from. Be aware that a lower credit score may cause your loan offering to come with a higher interest rate or other stipulations.

Related: Compare Best Personal Loans in 2023 | Credello

What is an auto loan?

As opposed to a personal loan, an auto loan is a specific secured loan that allows you to finance a vehicle. That vehicle acts as collateral on the loan. This means that if you stop making payments, the lender will repossess the vehicle. Considering that this is a secured loan, lenders are typically willing to offer more favorable interest rates due to the added security.

Until you make the final payment on your auto loan, the lender retains the final ownership. Once your loan is completely paid off, however, total ownership is transferred to you permanently.

Requirements of auto loan

Regarding a personal loan versus an auto loan, the requirements are quite similar. You will still need to provide all the required information needed for a personal loan. As opposed to describing the use of the loan, lenders will ask you the make and model of the vehicle you wish to finance. Some lenders will have restrictions on vehicles they are willing to lend on, so be sure to read the fine print before applying.

Auto loans may be approved with a lower score than a comparable personal loan due to the added security and because you can place a large down payment.

Pros and cons of personal loans

To evaluate an auto loan versus a personal loan, it’s important to look at the pros and cons of both. Here are some of the standout pros and cons of financing a car with a personal loan:

Pros of personal loans

  • Lower risk of repossession
  • No down payment required
  • No restrictions on allowed vehicle type

Cons of personal loans

  • Higher interest rate
  • A potentially larger form of security depending on the loan size

Pros and cons of auto loans

The advantage of auto loans may seem clear off the bat when the purpose of the loan is for an auto purchase, but there are still some crucial pros and cons to consider:

Pros of auto loans

  • Potentially lower interest rate than what is offered on a personal loan
  • More affordable in the long run
  • Lower credit score required for approval in most cases

Cons of auto loans

  • Higher upfront cost with down payment
  • Restrictions on vehicles that can be financed
  • Risk of repossession
  • Car insurance usually required

Personal vs. auto loans: What’s the difference

The primary difference of a personal loan vs. car loan lies in the fact that a personal loan is typically unsecured and can be used for any purchase. Additionally, the loan amount for personal loans is usually higher than auto loans unless a high-end luxury vehicle is being financed.

Additionally, when considering a personal loan or auto loan, it’s important to remember that auto loans typically offer more favorable rates since they are secured. Just remember that with an auto loan, your vehicle can be repossessed if you stop making payments to your lender.

When is a personal loan better than a car loan?

While auto loans are a better financing choice for vehicles, often, compared to personal loans, there are some situations where the latter is better. As examples:

  • Purchasing an older or restricted vehicle: When the vehicle you wish to finance isn’t covered by an auto loan, opting to use a personal loan instead can be an excellent choice
  • Buying from individuals: Purchasing a vehicle from another individual typically requires cash and they may want it immediately, which may be easier to procure using a personal loan

When is an auto loan better than a personal loan?

In most cases for an auto versus personal loan, the auto loan is the better vehicle financing choice. Not just for personal loan vs. auto loan rates, but the following reasons as well:

  • You’re buying an approved vehicle: If a lender offers auto financing for the vehicle you desire, it’s almost always better to finance it with an auto loan
  • You don’t have as high a credit score: Since the loan is secured by the vehicle, lenders may be willing to make the loan if you have a lower credit score
  • You’re looking for a longer repayment term: Auto loans have repayment terms that can go as long as seven years in some cases, which is more than the typical two-to-three-years offered by most personal loans

Additional considerations when choosing a loan

Beyond just considering the basics when looking at a personal loan vs auto loan for car purchases, there are additional things to consider. First and foremost, take your credit score into account and evaluate your history of debt. If making on-time payments has been a struggle in the past, it may be worth considering holding off until you raise your credit score.

Additionally, don’t settle for the first loan offering you come across. Take the time to ensure you are receiving the best possible offer for your financial situation. Compare offerings from dealerships, banks, credit unions, and all other sources to be sure you are receiving the best value.

Best financing option for your car

The best financing option for your car is a case-by-case situation. For those who are looking for special or antique vehicles that aren’t covered by a traditional auto loan, opting for a personal loan may be the better choice. Comparing a personal line of credit vs. an auto loan, as somebody looking to purchase an average commuter vehicle, may show you that a standard auto loan is the best choice.

In general, auto loans tend to be the cheaper option in the long run assuming you can afford the loan. This will require an up-front down payment, but due to the added security of the vehicle as collateral, you will likely receive a lower interest rate.


No, most personal loans will carry higher interest rates than an auto loan because many personal loans are unsecure. Since an auto loan is secured by the vehicle itself, lenders will often offer lower interest rates.

Typically, financing a car loan will be a multi-day process, but it shouldn’t take longer than a week unless there is something worth noting in your application. However, this is a lender-by-lender process, so be sure to ask what the standard timeline looks like from your specific lender.

A car loan will affect your credit score positively or negatively, depending how you handle the loan. Assuming you make all your payments on time and in fullin-full, your credit score will likely improve slowly over time. However, defaulting on your car loan will almost certainly result in a hit to your credit score.

For those of you with substandard credit scores, auto loans may still be available depending on the lender. Considering the fact that a vehicle is secured as collateral on an auto loan, lenders are more willing to provide the loan due to the added security. With that said, if your score is extremely poor, you still may not be approved for the loan.

Yes, assuming you make all your payments on time and in full, financing a car will help you build your credit over time.