How to decide between a car loan and a personal loan |

Compare car loans vs. personal loans

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Making the right decision could have a big impact on your future budget.

When you’re looking to buy a new car, part of your research process always involves determining what type of loan you should get. By comparing loan amounts and interest rates between car loans and personal loans, you can get a good idea on how much a loan will cost. Both have their benefits, so weigh your options carefully before committing to a lender.

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 fund the same thing, and the terms of personal loans can vary widely.

Before you get started, ask yourself these five questions:

  1. 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 you won’t lose it to repossession.
  2. 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 preapproval on a car loan so you know exactly how much you can afford to sink into your next car.
  3. 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.
  4. 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.
  5. 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 a 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 loan options.

Our top pick: Car Loans

  • Min. Credit Score Required: 300
  • APR: Varies by network lender
  • Requirements: Must be a US citizen with a current US address and employed full-time or have guaranteed fixed income.
  • Easy online application
  • Fast response time
  • Bad credit, no credit OK

Our top pick: Car Loans

Apply with a simple online application to get paired with a local auto lender. No credit and bad credit accepted.

  • Min. Credit Score Required: 300
  • Requirements: Must be a US citizen with a current US address and employed full-time or have guaranteed fixed income.
Credible Personal Loans

Our top personal loan pick: Credible

Quickly get personal loan offers from top online lenders.

  • Minimum Loan Amount: $1,000
  • Maximum Loan Amount: $100,000
  • Loan Terms: 2 to 7 years
  • One simple form
  • Must have good to excellent credit

    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 beaten path. Your loan will likely have many of these features:

    Personal loans

    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 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 a car right away.

    • Unsecured. Personal loans are typically unsecured and don’t require collateral. Lenders rely on your credit and financial situation to determine if they should lend to you. But because they aren’t secured, they usually have a higher interest rate than car loans.
    • Shorter application. Since you won’t need to provide collateral, 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 titling. A car loan may not extend that far.

    Car loans

    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 to 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.

    Compare car loans and personal loans

    Updated March 20th, 2019
    Name Product Filter Values Minimum Credit Score Loan Term Requirements
    Varies by lender
    Must be a US citizen with a current US address and employed full-time or have guaranteed fixed income.
    Apply with a simple online application to get paired with a local auto lender. No credit and bad credit accepted.
    Varies by lender
    Must be employed full-time or have guaranteed fixed income of at least $1,500/month and be a current resident of the US or Canada.
    Get connected with an auto lender near you, even if you have bad credit.
    Good to excellent credit
    Good or excellent credit, enough income or assets to afford a new loan, US citizen or permanent resident, 18+ years old
    Quick car loans from $5,000 to $100,000 with competitive rates for borrowers with strong credit.
    Fair or better credit
    From 2 years
    Car must be less than 10 years old with fewer than 120,000 miles. Current loan must have a balance between $5,000 and $55,000 and at least 24 months left in its term.
    Lower your monthly car payments and save on interest through a fast and easy online application process.
    Income of $2,000+/month, vehicle has less than 150,000 miles and is no older than 8 years, loan balance is between $10,000 and $100,000, debt-to-income ratio is less than 50%
    Connect with a network of over 150 lenders to refinance your car loan.
    Good to excellent credit
    Varies by lender
    Must be a US citizen and 18+ years old. Must have good to excellent credit.
    Compare multiple financing options for auto refinance, new car purchase, used car purchase and lease buy out.

    Compare up to 4 providers

    Rates last updated March 20th, 2019

    Reveal your potential loan offers and rates

    Answer two quick questions to filter the loan offers and get the best one for you.

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    Experian is a leading provider of personal and business credit reporting. Find out your FICO score now for less than the cost of a cup of coffee.

    Unfortunately, none of the personal loan providers offer loans for that credit score. If you are in urgent need of a small loan, you might want to consider a short term loan.
    Name Product Product Description Min. Credit Score Max. Loan Amount APR
    Credible Personal Loans
    Get personalized rates in minutes and then choose a loan offer from several top online lenders.
    Good to excellent credit
    5.34% to 35.99% (fixed)
    Monevo Personal Loans
    Quickly compare multiple online lenders with competitive rates depending on your credit.
    3.99% to 35.99% (fixed)
    Upgrade Personal Loans*
    Affordable loans with two simple repayment terms and no prepayment penalties.
    7.99% to 35.89% (fixed)
    LendingClub Personal Loan
    A peer-to-peer lender offering fair rates based on your credit score.
    6.95% to 35.89% (fixed)
    SoFi Personal Loan Fixed Rate (with Autopay)
    No fees. Multiple member perks such as community events and career coaching.
    5.99% to 16.99% (fixed)
    NetCredit Personal Loan
    Check eligibility in minutes and get a personalized quote without affecting your credit score.
    34% to 155% (Varies by state) (fixed)
    Best Egg Personal Loans
    A prime lender with multiple repayment methods.
    640 FICO®
    5.99% to 29.99% (fixed)
    Even Financial Personal Loans
    Get connected to competitive loan offers instantly from top online consumer lenders.
    3.84% to 35.99% (fixed)

    Compare up to 4 providers

    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 you qualify for.

    1. 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 make up the major difference between loans.
    2. Estimate the interest rate and total cost of your loan by getting online quotes or using a calculator.
    3. Check out the features of the loan. Prepayment fees and rate discounts could play a role in helping you decide whether you want a personal loan or a car loan.
    4. Decide which loan is more affordable and best suits your needs best. Try to limit your options to two or three lenders.
    5. Fill out an application and wait to see if you’ve been approved. Most lenders have a preapproval process that lets you check your rates before completing a full application.

    Bottom line

    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 out of a lender. You should read up on your personal loan options and review how car loans work before settling on a loan.

    Frequently asked questions

    Elizabeth Barry

    Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).

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    2 Responses

    1. Default Gravatar
      HuweyJanuary 27, 2019

      Hi, I’m wondering if it’s best to pay off my car loan with a personal loan with a much lower interest rate and lower monthly repayments, but I’m worried about it affecting my credit score and ability to get a good rate interest rate and borrow more on a mortgage in the future (within the next 5 years). Is this a good idea or should I stick with a car loan to allow me to get a better mortgage and borrow more with a good rate of interest? Can you help?

      • finder Customer Care
        JoshuaJanuary 28, 2019Staff

        Hi Huwey,

        Thanks for getting in touch with finder. I hope all is well with you. :)

        That’s an interesting question and idea you got there, Huwey. As a comparison website, we are not permitted to provide specific recommendations. However, for you to know the best course of action to take, you would need to first weigh the pros and cons of each option that you have.

        Aside from personal loans, you can also refinance your car loan. However, please know that there’s a possibility for your credit score to lower by a few points when you apply for a new loan, since your new lender may register new hard credit inquiries.

        For this reason, I would highly recommend for you to determine whether the pros outweigh the cons or not when it comes to making your decision.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!


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