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Personal loan or car loan: Which is right for me?

Peter Warden
The Mortgage Reports editor

Personal loan or car loan? There’s no AUTOmatic answer

You’re planning on changing cars. If you’re any sort of gearhead, you’re going to be really excited. But take your foot off the gas long enough to think through your financing options. For example, would a personal loan or car loan leave you better off?

Beware dealer financing

Look, there are loads of honest dealers who wouldn’t dream of ripping you off. And some will offer you the cheapest financing you can get.

But they’re not all like that. And even the good ones face harsh economic realities: They often make as much or more from selling you financing and insurance as they do from getting you to buy those big, shiny lumps of metal, according to Edmunds. So they really want to finance your purchase. And the worse the deal you get, the more they stand to make.

So do yourself a favor. Before you set foot on a dealer’s lot, get multiple quotes for personal loans and auto loans. Compare them and print off the best. When the fast-talking salesperson presents you with the dealership’s “very best” financing offer, pull out yours and begin negotiating for real.

And before you do any of that, read HuffPost’s 7 Ways To Avoid Being Ripped Off When Buying A Car.

Check my eligibility for a personal loan to purchase a car * (Aug 25th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – CA, NV

Secured vs. unsecured

When you’re choosing between a personal loan or car loan, the first difference to note is that a car one is secured. A personal loan is unsecured.

A secured loan is one where you put up an asset as collateral, aka security. If you default, the lender can seize that asset, sometimes without going to court.

So a mortgage is a secured loan because your home can be foreclosed on. And a car loan is one because your loan agreement grants your lender a right to repossess the vehicle.

Personal loans are different. True, lenders will come after you hard if you default — with collection agencies and ultimately perhaps even court action. But you shouldn’t wake up one morning to find a repo person unexpectedly winching your car onto her tow truck.

How to get a personal loan: Step-by-step guide

Costs

The upside of a secured loan is that the lender’s less likely to lose money — or, at least, as much. So it can afford to give you a lower interest rate.

For example, if you have stellar credit and healthy personal finances, you might get a car loan with a 0% APR promotional rate from a dealer. Or one that begins with a 1 from another lender — though those are rare. Even the best personal loans start with a 4 — and go up to 36% or even more.

Low rates aren’t always cheapest

It’s hard to beat a 0% APR. But even low rates don’t always result in the lowest total cost of borrowing.

For instance, if you get offered so-so rates on a personal loan or car loan, you can make real savings by keeping your term short. But you have to be able to afford the higher monthly payments that fewer installments inevitably require.

Setup costs

With personal loans, you generally get low setup costs and you’ll often pay nothing. It’s similar for car loans.

Top 12 reasons more people are using personal loans

With dealer financing, watch out for extras piled onto your borrowing. Things like upfront payments for etching your vehicle identification number (VIN) onto windows and future oil changes are rarely good value for money. And gap insurance is almost always cheaper from your existing insurer.

Check my rate for a personal loan to purchase a car * (Aug 25th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – CA, NV

Flexibility

This is where personal loans really score. They’re “any purpose” loans, meaning you can do what you like with the money once you have it. So, if you want to buy a classic car, an exotic one, an RV or just an old banger, you can do so.

But it’s typically different for car loans. Those tend to have tight rules about the sorts of vehicles that can be financed. And if you want something a bit different, you’re out of luck. So a personal loan may be your only choice.

Personal loan or car loan — a dilemma resolved

If you’re an ordinary Joe or Jo wanting a new or newish car, you’ll likely be better off with an auto loan. Though it’s worth checking quotes for personal loans, just in case you luck out.

But suppose you want to buy a vehicle that’s a little (or a lot) different from most. A personal loan may be your best or only bet.

Check my eligibility for a personal loan to purchase a car * (Aug 25th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – CA, NV