Personal VS. Auto Loan - How To Finance Your Car

Personal VS. Auto Loan - How To Finance Your Car

Written by June 29, 2022

Buying a new vehicle usually comes with a need to borrow money, and many people have trouble deciding whether to opt for a personal loan, or an auto loan. Though somewhat similar in terms of scope, there are considerable differences between the two options that buyers should be aware of.

Choosing which option to go with involves knowing these differences so that you can make an informed decision. Read along to learn how personal loans differ from auto loans, and which alternative is the best choice for your specific car-buying needs.


Personal loans are as the title suggests - a loan taken out for personal purposes that can involve many things. In this particular instance, the loan would be used to buy a car, but it could easily be used for other things as well. Personal loans can be secured against an individual’s collateral, which may or may not be advantageous depending on things like annual salary, outstanding debts, etc. They may also be obtained “unsecured,” which is how many prefer.

The best advantage to personal loans is that interest rates and total borrowing amounts are tied directly to a credit score. This opens up a lot of options for the borrower, especially if they want to take out more money to pay for other things like home improvements, vacations, etc. It’s an opportunity to take out one one loan for multiple purposes, instead of several different loans with their own respective interest rates. This can save borrowers a lot in the long run.

Unsecured personal loans mean borrowers will be paying higher interest rates, since they have no collateral to act as insurance. Alternatively, those in financially secure positions who wish to take advantage of lower interest rates can put up collateral without generally having to worry about any problems arising. It’s up to the borrower to decide which is best.

As far as payment terms go, personal loans tend to have set repayment periods that operate on a 12 to 36 month basis. This is a huge difference compared to an auto loan, where the payments are spread out over the course of up to 5-7 years in a lot of cases. Personal loans can offer low interest rates, but the shorter loan periods mean higher monthly payments. For those who are tight on cash, an auto loan may be a more attractive prospect.


In contrast to a personal loan, an auto loan has only one purpose - to purchase a vehicle. It can’t be used for anything else, and the terms are a bit different in terms of scope. Instead of the loan being tied to collateral, the auto loan is tied to the vehicle itself. If you default on your payments, the lender can - and will - seize the vehicle to sell it off and recoup their lending costs. Until the car is paid off, it’s considered the property of the lender, which creates its own set of drawbacks.

For instance, many auto loan lenders stipulate that an individual must take out full insurance coverage on the vehicle to act as a safeguard for their investment. This means higher annual insurance costs versus a pick-and-choose approach commonly associated with buyers who own the car outright. Similarly, there’s no room to customize or alter the vehicle’s appearance, engine or interior, as this alters the purchase value of the car. Until the vehicle has been paid off, things like horsepower upgrades, interior customization and a new paint job will probably be off limits.

The good thing about auto loans is that they are considered low risk debt, which translates to reduced interest payments over the long term. Similarly, auto loans operate on a fixed interest rate as opposed to variable, which means no nasty surprises from month to month, depending on the state of the economy.

As opposed to personal loans, auto loans have fixed terms anywhere from 36 to 72 months on average. Your choice dictates how much you will be paying in interest over the long term. It’s true that borrowers can pay significantly lower monthly payments for their vehicle, but it may cost them significantly by the time the loan period has ended. Credit scores are less vital for securing a car loan, but they will have an impact on the interest rate, so bear this in mind.


Choosing a personal loan over an auto loan is really up to the borrower, and they must decide on the pros and cons of both, not to mention the long-term associated costs of borrowing. There’s no right or wrong answer here; it merely depends which option is best for you at any given moment in your life. Auto loans are generally considered easier to obtain, though it’s easy to fall into the trap of spreading out payments over a longer term, which means more money forked out in the end. Personal loans are great for those with established credit and good collateral who wish to buy a car and pay it off quickly to avoid incurring too much interest.

If you’re having trouble deciding which type of loan to choose for your next vehicle purchase, contact today, and we’ll be glad to help. You may even find your dream vehicle from our excellent and ever-growing inventory, and we’ll work with you to draft up the right loan that can save you in the long run.

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