Car Loan vs Personal Loan: Which is Better for You?

Car Loan vs Personal Loan

When financing a vehicle, you typically have two main options: a dedicated car loan or a personal loan. Each has advantages and disadvantages.

Car Loans (Secured)

How they work: The vehicle serves as collateral for the loan.

Lower interest rates (3-7% for good credit)
Longer terms (3-7 years common)
Easier approval for people with decent credit
Risk: Vehicle can be repossessed if you default

Personal Loans (Unsecured)

How they work: No collateral required, based on creditworthiness.

Higher interest rates (6-36% depending on credit)
Shorter terms (1-5 years typical)
More flexibility - can buy from private seller
No risk to vehicle if you default (but credit damage)

Comparison for $20,000 loan:
• Car loan (5%, 5 years): $377/month, $2,645 interest
• Personal loan (10%, 4 years): $507/month, $4,351 interest
Car loan saves $1,706 in interest!

When to Choose Each Option

Choose a car loan if:

You have good credit (score 670+)
You're buying from a dealership
You want the lowest possible payment
You're financing a newer vehicle

Choose a personal loan if:

You're buying from a private seller
You have excellent credit (score 720+)
You want to pay off the loan quickly
You're buying an older vehicle that doesn't qualify for auto loans

US-Specific Considerations

Some states have usury laws limiting interest rates
Credit unions often offer better rates than banks
Dealer financing can include special promotions (0% APR)
Consider gap insurance for financed vehicles

Compare both options with our loan calculator.