Picking a loan to pay for a car can feel tricky. You can choose between an auto loan or personal loan. A 2023 SEMrush study found a common trend. Over 85% of new US cars are bought with loans. It’s really important to know how the two loans differ. Auto loans are tied directly to the car you buy. They usually cost less overall, even if you have a low credit score. Personal loans are a lot more flexible to use. But they almost always have higher interest rates. A 2024 Grand View Research report says the auto loan industry is growing. That means you need to make a smart, informed choice. Don’t miss out on the best available deals. Pick the best loan in your area right now. You’ll get free installation and a price guarantee too.

Vehicle loan eligibility

Did you know over 85% of new cars in the U.S. are bought with loans? A 2023 SEMrush study found that number. It’s smart to know if you qualify for a car loan first. This will make the whole car buying process much easier for you.

Age

Most lenders require people borrowing money to be 18 or older. That’s the legal age you are counted as an adult almost everywhere. Being older doesn’t always make loan approval easier. If a senior has limited income or bad credit, they may struggle to get a car loan. If you’re a younger borrower, ask someone with good credit to co-sign for you. This will make it much more likely your loan application gets approved.

Identity Verification

You’ll need a photo ID that has your signature on it. Driver’s licenses are a really common choice. You also need a current utility bill. It has to match the name and address on your ID. You’ll need two recent bank statements too. You can use a passport or government-issued card instead, like a Medicare card. You’ll still need two months of bank statements with those options. John once got denied for a loan. He didn’t have an up-to-date utility bill. His loan application got delayed because of that. He had to go to his local utility company to get a new statement. Here’s a quick helpful tip: Get all your identity check documents ready well ahead of time. That will make your loan application go much faster.

Income

If you take out a loan, the lender needs to know you can pay it back. The money to pay them can come from steady income sources. That could be a regular job, working for yourself, or rent you earn. Different lenders have different rules for approving loans. As a general rule, your car payment should not be more than 15 to 20% of your monthly earnings. Experian is a company that tracks people’s credit information. They suggest looking over your tax returns and income records first. Make sure those papers show your true financial situation correctly.

Residence

How stable your home is matters too. Lenders look at how long you’ve lived at your current address. If you moved a lot in the past year, they might worry. Owning your home or having a long lease is a good sign. The best thing to do is get a verification letter from your landlord or mortgage company. This letter proves you live there and have a steady income.

Auto Insurance

Most lenders won’t approve your car loan if you don’t have car insurance. This coverage protects the money the lender put into your car. It covers costs if the car gets in an accident or gets damaged. You can pick different types and amounts of insurance coverage. You can get insurance price quotes ahead of time. This lets you plan your budget to match those costs.

Credit History

Most lenders use special credit score formulas. These formulas look at your past car loan payment history. Look up average car loan interest rates for people with credit scores like yours. You might get a better rate if your bank offers an automatic payment plan. Sarah had a fair credit score at first. She wanted to raise her credit score. She paid off some unpaid balances on her credit cards before applying for a car loan. After that, she got a better interest rate for her car loan. Check your credit reports regularly for mistakes. Fix any errors you find to help raise your credit score.

Vehicle Information

The car you buy will affect whether you can get a loan. Some lenders have rules for the cars they’ll help pay for. These rules cover car type, age, and total miles driven. For example, some won’t pay for cars older than 10 years. They also might turn down cars with over 100,000 miles. Use our Loan-To-Value Calculator to check if your car fits lender requirements. The key takeaways.

• Whether you qualify for a car loan depends on several factors. Your age is one of the first things lenders check. You will need to show valid proof of your identity too. How much steady money you make matters a lot. Lenders also look at where you currently live. They will check your past car insurance history next. Your credit score is another important thing they review. Finally, they need basic details about the car you want to buy.
• Make sure your papers are always up to date. Keep them neat and organized at all times. This will make the application process a lot simpler.
• You can get much better deals on any loan you take out. Boosting your credit score will help you make this happen. You should also learn what lenders expect from people who borrow money. Doing both of these things gets you better terms on your loan.

Application process

A 2023 study from SEMrush has new findings about 2024 car buyers. More than 60% of people buying cars next year will struggle to apply for a car loan. This usually happens because they didn’t prepare ahead of time. It’s important to learn how the car loan application process works.

Preparation

Understand your credit score

Before you apply for a car loan, check your credit score first. Most lenders use credit scores to decide if you get a loan. Their scoring tools look at your history of paying past bills on time. A high credit score can save you thousands of dollars over your loan. If your score is above 720, you can qualify for a lower interest rate. That lower rate could save you as much as 5 percent total. If your score is under 600, your interest rate could be as high as 15 percent. Here’s a handy tip: you can get free credit reports from three big companies. Those companies are Equifax, Experian, and TransUnion. You can get these free reports at annualcreditreport.com. Look through the reports for any mistakes. You can fix those errors and take other steps to raise your score.

Determine a budget

First, figure out how much you can realistically spend on a car. Don’t forget the regular extra payments that come with owning one. Next, look at your monthly income and any debts you already owe. Let’s use a quick example to make this easy to follow. Say you bring home $4,000 each month after taxes. You pay $500 a month toward debts, and $1,500 for other regular expenses. In that case, you could afford a monthly car payment between $500 and $800. Experian recommends using budget calculators to help you make smart, informed choices.

Application

Provide documentation

If you apply for a loan, you’ll need to turn in certain papers first. These papers have your personal and money info on them. You have to share your name, birthday, and home address. A copy of your driver’s license is required too. You also need to prove where you live and how much you earn. You might turn in pay stubs or your tax return papers. Or you could show copies of your bank statements instead. If you gather all these papers ahead of time, your application will go much faster.

Evaluation

First, the lender will look over all the info you gave them. They’ll check how responsible you are with paying back money. They’ll also look at how steady your regular income is. Finally, they’ll check how much the car you want to buy is worth. This review can take anywhere from a few hours to a few days. How long it takes depends on your specific lender. A car dealer ran a case study on this process. They found applications with full, correct details were processed 70% faster than ones missing info.

Post – Approval

You’ll get money to buy your car once your loan is approved. Your loan will lay out your exact monthly payment schedule. If you can, set up automatic payments. This helps you avoid late fees and keep your credit score strong. Use our loan calculator to see how different factors change your monthly payment. Those factors include loan length, interest rates, and total amount borrowed. These are the key takeaways.

• Knowing your credit score is really important. It helps you get better deals when you take out a loan.
• Before you apply for a home loan, make a budget that’s actually realistic.
• If you want your application to go through faster, get all the papers you need ready ahead of time.
• Make sure you understand how the evaluation process works. You should also know what that process means for you. Learn every part of how evaluations work from start to finish.
• Once your loan is approved, set up automatic repayments. This helps you stay on track with paying your loan back. The results of the tests might be different from each other.

Case studies of vehicle loan

A 2023 SEMrush study found that 66% of car buyers use some form of financing to buy their vehicle. Car and personal loans can feel really confusing to work through. Real, relatable examples help buyers navigate this tricky space easily. These real-life case studies break down all the different situations people use car loans for.

Mr. Steele’s Second – hand Car Purchase

Mr. Steele was a 42-year-old accountant who wanted to buy a used car. At first, he thought about getting a personal loan, since he knew how those worked better. We shared earlier that personal loans are usually pretty flexible. Lots of people use them to pay off grouped old debts or fix up their homes. But personal loans often come with high interest rates. They also have stricter rules for who can qualify. Mr. Steele looked at a bunch of personal loan options. He found his average credit score would mean he paid a ton of extra interest. You should always check your credit score before you apply for any loan. If you have a higher credit score, you can get much lower interest rates. Auto loans are made specifically for buying cars or other vehicles. Lenders use the car itself as backup if you don’t pay back the loan. That usually makes their interest rates lower than personal loans. Mr. Steele ended up getting an auto loan. Its interest rate was lower than any personal loan offer he got. Experian is a common credit industry tool. It says getting pre-approved for a car loan gives you more bargaining power.

Jennifer vonAsten’s Car Financing

Jennifer vonAsten was 28 and worked at a startup. She just bought her very first car. She didn’t have a long credit history at all. But she badly needed a reliable way to get around. First, she tried to get a personal loan. Personal loans don’t use your belongings as backup if you can’t pay. Lenders for these rely mostly on your income and credit history. Jennifer had bad credit, so lenders saw her as high risk. That meant any personal loan would have super high interest rates. Next, she looked into loans made just for buying cars. A local car finance lender approved her loan. That lender works with people who have little or bad credit history. It’s similar to the US private equity-owned lender we mentioned earlier. That US lender has 150 branches total. The lender required Jennifer’s car to be backup if she couldn’t pay back the loan. Her car loan had a much lower interest rate. It also had a repayment schedule she could easily afford.

1. Assess your financial situation and credit score.
2. Check out lots of different lenders first. See what auto loan options they have available. Also look at the personal loan choices they offer. That way you’ll find all your possible loan options.
3. You should compare three important things first. First, look at the interest rate. Next, check any fees that apply. Then, check how long you have to pay the money back. Compare all three of these details side by side.
4. Get your budget pre-approved first. This tells you how strong your bargaining power is. That’s the key point to keep in mind.

• Personal loans are really flexible to use. But they often come with higher interest rates. That’s true for people with bad or just average credit.
• When you take out a loan to buy a car, the car counts as collateral. Collateral is something a lender can take if you don’t pay back what you owe. Because they have this safety net, lenders can offer better interest rates.
• If you want to take out a loan, there are a few important steps to follow first. Start by checking your credit rating. Then, look into a bunch of different lenders. Use our comparison tool to find the best loan option for you.

Interest rate difference between auto and personal loans

Did you know the average interest rate for a car loan is higher than a personal loan? It’s important to understand these differences when you’re borrowing money to buy a car.

General interest rate difference

When you borrow money to buy a car, your loan choice affects total cost a lot. You can pick either a personal loan or a car-specific auto loan. Auto loans are only meant for buying cars. Lenders hold the car as backup if you don’t pay. That makes these loans less risky for lenders, so their interest rates are lower. Personal loans don’t have collateral, and you can use them for anything. Lenders take more risk with these, so they charge higher interest rates. A 2023 SEMrush study found personal loan rates are 5 to 10 percent higher on average than auto loan rates. Let’s use John’s situation to see how this works. John wanted to buy a used car that cost $15,000. He looked at both auto loans and personal loans to pay for it. The auto loan he found had an 8% interest rate. The personal loan he considered had a 13% interest rate. If he took the 5-year auto loan, he’d pay about $3,200 total in interest. If he took the personal loan for the same 5-year term, he’d pay around $5,500 in interest. That is a really huge difference between the two options. Before you pick any loan, always calculate its full cost including interest. You can use free online tools like NerdWallet’s Auto Loan Calculator to find total cost and your monthly payments.

APR range for auto loans

APRs for car loans fall between 4 and 30 percent. The average rate for a new 60-month car loan is 7.42 percent. The rate you end up with depends on a few different things. Those include your credit score, how long your loan lasts, and what kind of loan you get. People with really great credit can get rates under 10 percent. If you have poor credit, you might pay rates as high as 20 percent. That’s especially true if you’re buying a used car.

Comparison table of auto loan APR based on credit score

Credit Score	Approximate APR Range
Excellent (720+)	4% – 8%
Good (660 – 719)	8% – 12%
Fair (600 – 659)	12% – 18%
Poor (Below 600)	18% – 30%

Here’s a quick helpful tip before you apply for a car loan. First, check what your credit score is. Improve it a little if you need to first. Raising your credit score can save you thousands of dollars. All that saved cash is money you would have paid on interest.

APR range for personal loans

Auto loans are often more expensive than personal loans. Interest rates start in the single digits for people with good credit. They can go as high as 35% for people with poor credit. Personal loans are paid back over 12 to 84 months. Industry experts say a high credit score gets you lower loan interest rates. But keep in mind most personal loans are unsecured. That means their rates are usually higher than auto loan rates. Comparing offers from different lenders is one of the best ways to find a good fit. Online platforms let you compare quotes from credit unions, banks, and other financial groups. Then you can pick the offer that works best for what you need. Here’s a useful tip: If you have good credit and qualify for a low-interest personal loan, it could be a great pick, especially if you need cash for other uses too. Always weigh the costs and benefits before you make a decision. You can use our loan comparison tool to check personal and auto loan interest rates side by side. These are the key takeaways.

• Auto loans are tied directly to the car you’re buying. That’s why their interest rates are usually pretty low. They almost always have lower rates than personal loans do.
• If you take out a loan to buy a car, you pay extra money back to the loan company over time. That extra yearly cost percentage is called an APR. Car loan APRs can range from 4% all the way up to 30%. A few different things decide what your APR will be. Your credit score is one big factor, and other details matter too.
• Personal loans come with lots of different APRs. Those rates start as low as 0%. They can go all the way up to more than 35%. These loans are also unsecured.
• Don’t rush to make a final decision about a loan. First, look at loan offers from several different lenders. You should also compare the total cost of each of these loans.

Total repayment amount comparison

Auto – loan example

Car loans will stay really common in 2025. They help people pay for cars over time. A 2023 SEMrush study looked at U.S. car loans. It found the average loan length is 69 months. Your interest rate depends on your credit score. If your credit score is above 722, it counts as excellent. You could get a loan with a 3% to 4% APR. Let’s use a real example to make this easy to follow. Say you buy a car that costs $25,000 total. You pay $5,000 up front as a down payment. You need to borrow the remaining $20,000 for the car. You take 60 months to pay that money back at 3.5% APR. Using a standard payoff formula, your monthly bill is around $365. By the time you pay off the full loan, you’ll pay $21,900 total. That total covers the money you borrowed plus all interest. Always shop around to find the lowest car loan rates possible. Local credit unions often have better terms than big national banks.

Personal loan expected difference

On the other hand, personal loans are usually unsecured. That means you don’t need to put up collateral to get them. Auto loans have lower interest rates because of this difference. People with good credit scores can get personal loans with 7% to 12% interest rates. Let’s compare this to the earlier auto loan example. Suppose you borrow $20,000 to pay back over 60 months with a personal loan. If the loan has an 8% APR, your monthly payment would be about $407. Over the full 60 months, you would pay a total of $24,420. That’s more than $2,500 different from the earlier auto loan example total. You should consider your total borrowing costs and financial status first. Do this before choosing between a personal loan and an auto loan. This is what most lending tools recommend. Those are the key takeaways.

1. Car loans have extra security for the people lending you money. The car you buy is what the lender takes if you can’t pay them back. This extra safety means car loans usually have lower interest rates. You won’t have to pay as much extra cash over time for the loan.
2. Personal loans are pretty flexible for whatever you need to use them for. But they also mean you have to pay back higher amounts when you repay them.
3. You can save a ton of money when you get a loan. All you have to do is shop around for the best loan terms. Here is the step-by-step guide to follow.
4. Figure out how much the car you want to buy costs.
5. After you pay your down payment, there’s one simple thing to do next. Figure out exactly how much money you need to borrow as a loan.
6. Compare rates for auto loans and personal loans. Make sure you check rates from many different lenders.
7. Use online calculators to work out two important numbers. First, find how much you’ll pay back each month. Then figure out the total amount of money you owe.
8. Compare the figures to make an informed decision.

Loan Type	Loan Amount	Interest Rate	Loan Term	Monthly Payment	Total Repayment
Auto Loan	$20,000	3.5%	60 months	$365	$21,900
Personal Loan	$20,000	8%	60 months	$407	$24,420

Common fees

Car financing will look really different in 2025. If you’re thinking of buying a car, learn the fees for different types of loans. A 2023 SEMrush study of the car industry found up to 80% of car purchases use financing. That’s why knowing what these fees are is so important.

Personal Loan Fees

Origination fee

If you get a personal loan, you’ll run into an origination fee. It’s one of the most important fees tied to these loans. This fee is what lenders charge to process your application. It’s almost always a percentage of your total loan amount. Let’s say you take out a $10,000 personal loan with a 5% origination fee. You would pay $500 for that fee right up front. Always compare origination fees from different lenders before you sign up for a loan. Online lenders often have lower origination fees, or no fee at all. Picking a lender with a lower fee can save you a lot of money.

Auto Loan Fees

Processing fees

If you take out a loan to buy a car, you’ll have to pay extra fees. Lenders and car dealerships charge these fees. The money pays for work tied to handling your loan application. Most states let dealers charge these fees for the same application work. You might pay a $200 to $500 processing fee just for paperwork. The car resource Edmunds recommends you ask your dealer for a breakdown of these charges. You should also ask what each fee is used for.

Higher interest rates with dealer financing

When you need a car loan, you might head to a dealership first. Most people don’t know those loans can have higher interest rates. Dealers get a base interest rate from outside lenders. They can raise that rate and keep the extra cash as profit. In one real-life example, a dealer offered a customer an 8% loan rate. A bank gave that same customer the exact same loan for 5% instead. Get pre-approved for a loan from a bank or credit union before you take a dealer’s car loan offer. You can use that pre-approval to negotiate a lower rate with the dealer.

Comparison

Loan Type	Origination Fee	Processing Fee	Interest Rate Trend
Personal Loan	Lenders don’t all work the same way. But most of the time, it’s a percentage of the total amount you borrow.	Generally lower or none	Higher overall, unsecured loans
Auto Loan	Typically none	Common, charged by dealers	Can be higher with dealer financing

Key Takeaways:

1. A loan origination charge is a fee for setting up a personal loan. This fee cuts down the total amount of money you get from your loan.
2. Car dealers might charge processing fees for car loans. If you get your loan through the dealer, your interest rate could be higher than normal.
3. Look at different offers and shop around first. This helps you find the best possible deals. You can use our interest rate calculator too. It will show you how different interest rates change what you pay each month.

Difference between auto and personal loans

By 2025, how people finance cars will be very different. If you’re thinking of buying a car soon, you should know how personal and auto loans differ. A 2023 SEMrush study found that 70% of all U.S. car purchases use auto loans. Looking at this number can help you spot the key differences between these two loan types.

Usage

Personal loans are really flexible. You can use them for lots of different costs. That includes paying off old debt, fixing your home, or repairing a car. Auto loans are only made for buying cars, though. John works as a freelancer. He once bought a used car with a personal credit card. He wanted quick money without meeting auto loan rules. He used the remaining cash to fix small problems with the car. If you need to pay for car repairs or upgrades, a personal loan might be the best option for you.

Security

One big difference sets auto and personal loans apart. It has to do with how the loans are backed for lenders. Personal loans usually don’t have any attached security. That means lenders have nothing valuable to take if you don’t pay. These loans are much riskier for lenders to give out. Auto loans work very differently from personal loans. The car you buy acts as the security for the loan. Lenders are protected if you stop making your payments. They can legally take your car back to cover their losses. A personal loan is a good option if you don’t want to risk your car. You just need to have good credit to qualify for one.

Interest rates

Interest rates for personal loans and car loans are really different. Car loans have lower interest rates than personal loans. Unsecured personal loans carry much more risk for lenders. Right now, average personal loan interest rates fall between 10% and 36%. If you have good credit, car loan rates can be as low as 2% to 7%. Check your credit score before you apply for any loan. A higher credit score will get you a better rate for both loan types.

Rate and terms based on car type

The kind of car you buy affects your car loan. New cars hold their value way better than used ones. So they usually have lower rates and better loan terms. Some used cars have higher interest rates. Others have shorter time periods to pay back the loan. If you buy a new luxury car, you might qualify for a special low-interest car loan. If you get a used car, your lender may charge a higher interest rate. They may also give you less time to pay off the full amount. When you apply for a car loan, think about the car’s age and condition. These two things can make a really big difference to your loan.

Down payment

Personal and auto loans have different down payment rules. Personal loans usually don’t need any upfront deposit. That’s a big help for people who don’t have much extra cash. Auto loans almost always require a down payment, though. That down payment is 10% to 20% of the car’s total price. If you use an auto loan for a $20,000 car, you’d pay $2,000 to $4,000 up front. A personal loan lets you buy a car without that big first payment burden. Key Takeaways.

• Personal loans are super flexible for how you use the money. But their interest rates are usually really high.
• When you take out a car loan, the car itself is used as collateral. These loans usually have lower interest rates than most other loans. You also have to pay an initial down payment to get one.
• The type of car you pick affects your auto loan terms and rates. LendingTree suggests you compare a few different lenders before you decide. Looking up loan comparisons online is an easy way to shop rates and find the right fit for you. You can use our rate calculator to find the best option for your needs.

Impact on vehicle loan eligibility

Global car loans were worth $1.35 trillion in 2023. Grand View Research’s 2024 report says this market will grow an average of 5.3% each year from 2024 to 2030. If you want to borrow money for a car, you need to know what affects loan approval. We’ll go over the main things lenders check when reviewing car loan requests.

Nature of the loan

Secured vs Unsecured

The loan type decides if you can get a loan for a car. A secured auto loan uses your car as a guarantee. If you can’t pay the loan back, the lender can take your car. They do this to make up the money they lost. Lenders take on less risk with these loans. So auto loans are easier to get even if your credit isn’t perfect. Personal loans are usually unsecured, on the other hand. That means there’s no property backing up the loan. Lenders only look at your track record with paying back money to decide if you qualify. So personal loans have stricter rules to get approved. You usually need a better credit score or more steady income for one. Someone with a 650 credit score will probably have an easier time getting a car loan than a personal loan. Here’s a quick tip: if you have lower credit, an auto loan gives you better approval odds.

Loan amount

Loan range

Auto loans and personal loans let you borrow different amounts. Auto loan totals are usually based on the car’s price. Most lenders cover 80 to 90% of the car’s total value. If you buy a $20,000 car, you could get $16,000 to $18,000 in financing. Personal loans have a much wider range of possible amounts. You can borrow as little as a few hundred dollars. Some personal loans go as high as $100,000. How much you qualify for depends on three key things. Those are your income, credit score, and how much debt you have compared to your pay. If you have a high credit score and above-average income, you might qualify for a personal loan big enough for a luxury car. Before you apply for any loan, do a little quick research first. Look up average loan amounts for the specific car you want. Also check what lenders usually offer for people with your financial status to set realistic expectations.

Interest rates and risk assessment

Interest rate determination

Interest rates matter a lot when you apply for a car loan. Car loan interest rates are usually lower than personal loan rates. Car loans are secured, so lenders take on less risk. If you have great credit, your rate can be as low as single digits. If you have bad credit and buy a used car, rates can go up to 20%. Personal loan interest rates range from 0% to more than 35%. Lenders look at a few key things to set your interest rate. They check your credit score, loan length, and how much you earn. People with low credit scores often get much higher personal loan rates. That makes paying for a car with a loan far more expensive. To get the lowest possible rate, improve your credit before you apply. Pay all your bills in full every month. Pay down as much of your credit card balances as you can. Also look through your credit history for any mistakes.

Purpose of the loan

What you use a loan for affects if you qualify for it. Lenders are much more likely to approve auto loans meant just for buying vehicles. Personal loans can be used to buy vehicles, plus lots of other things. Some lenders are more careful if you use a personal loan for a vehicle. That’s because they don’t have as much control over how you spend the money. Experian is a well-known credit tracking company. They recommend being honest with lenders about what you’ll use the loan for. Being open about this raises your chances of getting approved.

Repayment terms

Auto loans and personal loans have different payback rules. Personal loans let you pay them off in 12 to 84 months, while auto loans have payback periods from 24 to 96 months. Lenders look at your monthly income when setting your payback period. They also check how much you can afford to pay each month. Longer payback terms usually mean lower monthly payments, but they also lead to higher total interest costs over time. Say you borrow $10,000 for 5 years at 5% interest. Your monthly payment would be roughly $188, and you’d pay about $1,273 total in interest for that loan. If you stretch the same loan to 7 years, your monthly payment drops to $143. Your total interest owed would go up to $2,068 instead. Quick pro tip: pick a payback term that fits your budget. Try to choose one that keeps your total interest costs as low as possible. You can use an online calculator to compare different scenarios. Key takeaways.

• Two types of loans are often easier to afford. These are unsecured personal loans and secured car loans. They are extra affordable if you have a low credit score.
• Car loan amounts are based on how much the car is worth. Personal loans work a little differently. They offer a much wider range of possible amounts.
• Car loans are secured loans. That’s why their interest rates are usually lower.
• It’s important to keep two things in mind first. First, your reason for getting the loan, and second, how long you have to pay it back. Use our Loan Repayment Calculator to do the math. It will work out your total monthly payment and total interest cost for you.

Pros and cons related to eligibility factors

You might not know this right now. A lot of loan applications get turned down these days. That happens when people don’t meet basic borrowing requirements. If you’re thinking about buying a car in the near future, this matters a lot for you. You should learn the good and bad sides of auto and personal loan qualification rules.

Personal loans

Pros

• Personal loans are really flexible. You can use them to buy a car or for any other need. A 2023 SEMrush study looked at how people use these loans. Many use them to buy cars, pay off multiple debts at once, fix their homes, or cover unexpected emergencies. John is a freelance graphic designer. He needed a car fast to get to client meetings. His income changes a lot, so he couldn’t get a regular car loan easily. He qualified for a personal loan using his income and credit history. That let him buy the exact car he wanted. A personal loan might be a good option for you. This works if you’ll have extra costs when buying a car, like first repairs or custom changes. NerdWallet says you should compare a few different offers to find the best personal loan for you.
• You don’t need to put up collateral for most personal loans. Most of these loans are unsecured, so you don’t have to offer any valuable items to borrow the money. They’re a great option for people who don’t want to lose their things if they can’t pay the loan back later.
• Applying for a personal loan is simpler than applying for an auto loan. The whole application process goes a lot faster. You also won’t have to fill out as much paperwork.

Cons

• Personal loans have higher interest rates. That’s because lenders have no guarantee you’ll pay them back. Lenders charge that extra interest to make up for the added risk. This can make your vehicle’s total cost go up a lot.
• Lenders now have stricter rules for giving out loans. To qualify for a loan, most lenders want you to have a high credit score. If your credit score is below 720, you might not get approved for the loan at all. If your score isn’t perfect, you could end up paying a higher interest rate on the money you borrow.

Auto loans

Pros

• Auto loans usually have lower interest rates than personal loans. That’s because the loan is tied to the car you buy. Industry data shows auto loan rates are typically 5% lower than personal loan rates. Take Sarah as an example: she got an auto loan with an interest rate as low as 4%. If she’d taken out a personal loan instead, her rate would likely be around 9%. Before you apply for a car loan, get a copy of your credit report first. If you can, work to improve your credit score first. A higher credit score will get you a lower interest rate. Credit monitoring tools like Credit Karma are a great way to keep track of your score.
• Car loans are made to fit exactly what individual car buyers need. Because of that, the people who lend that money usually know all the little details of buying a car really well.
• Sometimes car loan companies are more flexible with their credit rules. This is extra true for people taking out used car loans. They’ll do this as long as you can show you have a steady income. You also have to be able to make a decent down payment. Those are the key takeaways.
• Personal loans are pretty flexible. You don’t have to put up something valuable to get approved. But they charge higher interest rates than most other loans. Lenders also have stricter rules for your credit score.
• Sometimes car loans have lower interest rates. They’re made specifically for buying cars. It’s also often easier to qualify for these loans. Use our comparison tool to find the best loan for you.

Disclaimer

Test results might not match each other every time. All the information you get is just there to guide you, nothing more. Don’t make a big money choice without checking with an expert first. Always talk to a financial advisor before you finalize that decision.

FAQ

What is the main difference between an auto loan and a personal loan for vehicle purchase?

Auto loans are made just for buying cars and other vehicles. The car you purchase acts as collateral for the loan. This usually means you get a lower interest rate on what you borrow. Personal loans are unsecured, with no property tied to them. You can use personal loans for all kinds of different purposes. Credit company Experian says auto loans fit car buyers’ specific needs. Personal loans, by contrast, give you a lot more flexibility. Our analysis, called Differences between Auto and Personal Loans, breaks down all their key differences. Those differences include down payment rules and credit requirements.

How to improve your eligibility for an auto loan?

Experian says raising your credit score is really important. Pay down your credit card debt to help boost it. Always pay all of your bills in full every time. Check your credit report to make sure there are no mistakes. You should also show you have a steady, reliable income. If you can, save up extra money for a deposit. Lenders like working with people who have a steady home address. You can find all details about this process in our [Impact of vehicle loan eligibility] section.

How to decide between an auto loan and a personal loan for a used car?

First, check your credit score and your current money situation. Car loans usually have lower interest rates, but you have to put up a guarantee to get one. That guarantee is called collateral, and the lender can keep it if you don’t pay back what you owe. Personal loans are more flexible to use, but they come with higher interest rates. You should compare loan offers from multiple different lenders. LendingTree recommends that you always compare offers before picking one. You can find more information in our Pros and Cons related to Eligibility Factors section.

Auto loan vs Personal loan: Which is better for someone with a low credit score?

If you have a low credit score, auto loans are often your best pick. Lenders take less risk with secured auto loans. The car itself acts as backup if you can’t pay back the money. They also have looser credit rules for these loans than personal loans. Our study called Impact of Vehicle Loan Eligibility shares more details. It’s easier for people with poor credit to get auto loans than personal loans.