Making the right decision could have a big impact on your future budget.
How do I decide between a personal loan and a car loan?
Both personal loans and car loans can be used to finance a new or used car. Your choice should be based on your needs, your expectations for the future and the car you’re looking to buy. But no matter which you choose, carefully read the terms and conditions attached to each loan to decide if it’s right for you. Not all car loans are equal, and the terms of personal loans can vary widely.
Before you get started, ask yourself these five questions:
- Are you expecting your financial situation to change? If you’re anticipating a change in your financial situation, there’s a good chance a personal loan is a better choice. Even if you lose your income and default, your car won’t be used as collateral — meaning it won’t be repossessed.
- Do you know what car you want to buy? Knowing what car you want to buy puts you in a good position to negotiate with a lender. And since you’re already sure, you can apply for pre-approval on a car loan so you know exactly how much you can afford to sink into your next car.
- Are you buying a used car? Buying used instead of new can be an effective way of saving money, but you might not be able to find a used car loan for the car you want — especially if it’s an older model or has over 100,000 miles — and might have to take out a personal loan instead.
- Do you have bad credit? While having bad credit may make it harder to secure a loan, there are still bad credit car loans available. These tend to be a better deal than personal loans. This is because your car acts as collateral for the loan, giving you access to lower interest rates.
- Do you want to add extras to your car? It can be costly to make modifications to your vehicle, whether it’s just a new coat of paint or a change to the body of the car. Many car lenders won’t let you add this cost onto your loan. With a personal loan, you can add this cost onto the loan amount to have additional money for the extras.
At the end of the day, the most effective way to compare loans is by looking at specific options side by side. Using an online loan calculator can help you determine the exact value of each loan, and comparing loans by APR should give you the most accurate look at the final cost of your options.
What’s the difference between a personal loan and a car loan?
The exact terms of your loan depends on the lender you choose. However, most lenders don’t stray too far from the traditional model. Your loan will likely have many of the following features:
Personal loans are considerably more flexible than car loans. Not only can you find them just about anywhere — online, at your local bank, at credit unions — but they can also have relatively low interest rates without you having to put up collateral. Of course, you’ll still have to compare quite a few options, which can take time you don’t have if you need to get a car right away.
- Unsecured or secured. Personal loans may be secured or unsecured, but are typically unsecured (no collateral required). Lenders rely on your credit history and financial situation to determine if they should lend to you. But if your personal loan is unsecured, it may come with a higher interest rate than a car loans.
- Shorter application. If no collateral is required, personal loans tend to have shorter applications. You’ll simply list the general purpose of the loan when you apply.
- Use the funds for just about anything. Most personal loans don’t have restrictions on how you use your funds. You can use your loan to buy a car, cover any accessories and pay for taxes and registration. A car loan may not allow you as much leeway.
Car loans are designed to cover the cost of a car and related expenses like licensing and registration. You can borrow a car loan from a dealership, a bank or an online lender, whichever is more convenient for you.
- Lower interest rates. Since your loan is secured by your vehicle, your rates will be more competitive.
- Longer application. Car loan applications require more information for your lender, specifically about the make and model of the vehicle you’re buying. But don’t worry — many lenders give you time to shop and fill this info out later.
- More restrictions. A car loan can only be used for the purchase of a vehicle, although some lenders will allow the loan to cover taxes as well. And if you’re buying a used car, you may face limits on the vehicle you can buy with regards to its age, mileage and other factors.
Compare car loans and personal loans
Step-by-step guide to finding the right type of loan
The following steps should help you find a loan that works for you. Use these steps as a guideline; your unique financial situation will impact the exact loan terms and amount that you qualify for.
- Compare different lenders and write down a list of loans you’ll likely qualify for. Remember to note the loan term and the APR as these will prove to be the primary points of difference between your loan choices.
- Estimate the interest rate and total cost of your loan by getting online quotes or by using an online loan calculator.
- Check out the features of the loan. Prepayment fees and interest rate discounts could play a role in helping you decide whether you want a personal loan or a car loan.
- Decide which loan is more affordable and best suits your needs. Try to limit your options to two or three lenders in order to make your choice easier.
- Fill out an application and wait to see if you’ve been approved. Most lenders have a pre-approval process that lets you check your rates before completing a full application and credit check (they will likely perform a soft credit check, not a full one).
Deciding between a car loan and a personal loan can impact your finances for years to come. It’s a big decision, and the right choice will depend on what you want from your lender. You should read up on your personal loan options and review how car loans work before settling on a loan.
Frequently asked questions