While a personal loan can be used to buy a car, an auto loan will cost much less.

When most people buy a car they finance the purchase. Typically, folks get an auto loan but sometimes they use a personal loan. While both types of loans can be used to get a new set of wheels, an auto loan will cost less overall.

What’s the difference between a personal loan and auto loan?

Personal and auto loans are two great financial tools for financing big purchases but there are differences in how each works.

The first difference is how the loans may be used. Personal loans can be used in a variety of ways, including taking a vacation, paying bills or even buying a car. Some lenders restrict how the money can be used so you need to read the fine print when shopping for a loan but in general personal loans give borrowers a lot of flexibility. In contrast, auto loans can only be used to buy a vehicle. An auto loan will specify exactly what car the loan can be used for, and the vehicle identification number (VIN) will be included in the loan documents.

A second key difference between a personal and auto loan is collateral. A personal loan is unsecured; this means there’s no collateral. With an auto loan, the vehicle is used to secure the loan. Unsecured loans are riskier for lenders than secured loans and that’s why the interest rate will be higher on a personal loan than on an auto loan.

One thing personal and auto loans have in common is that your credit will affect your loan’s interest rate. The better your credit score, the lower the rate you’ll be able to get.

Auto loans cost less

To see the benefit of an auto loan in dollars, let’s run the numbers with a hypothetical car buyer. Travis is going to buy a car for $50,000. Here’s a side-by-side look at his purchase with an auto loan compared to a personal loan:

	Auto Loan	Personal Loan
	60-month/$45,000 loan at 7% with 10% down	60-month/$50,000 loan at 12%
Down payment	$5,000.00	none required
Monthly payment	$891.05	$1,112.22
Total payments	$53,463.27	$66,733.40
Total interest paid	$8,463.27	$16,733.40

Even when Travis adds his $5,000 down payment to the total payments of $53,463.27 on the auto loan, his overall purchase cost is $58,463.27. That’s a whopping $8,270.13 less than the personal loan’s cost of $66,733.40. The total interest on the auto loan is about half of the personal loan’s.

The auto loan lowers both monthly and overall costs, leaving Travis with greater financial flexibility. The $221.17 in monthly savings can be set aside for other things like emergency savings or even the down payment on Travis’s next car.

Have auto loan questions?

You can find out more about Consumers auto loans online or call us at 800-991-2221. And if you have trouble getting financed because of credit, our Credit Smart Program can show you what to do to improve your credit score.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.