By Jennifer Tucker
October 7, 2024 | 2 Min. Read
When you’re looking to finance a big purchase like a car, you may come across two common loan options: personal loans and car loans. While both can provide the funds you need, there are important differences between the two.
Here, we’re explaining the difference between a personal loan and an auto loan and offering guidance on how to determine which loan type is right for you. Learn more about getting a car loan.
A car loan is a secured loan specifically designed for purchasing a vehicle. Because it’s secured, the car itself acts as collateral for the loan, meaning the lender can repossess the car if you fail to make your loan payments. Here are some key features of a car loan:
Specific Purpose: Car loans are specifically used to buy a vehicle, and the loan amount is based on the car’s price.
Lower Interest Rates: Since a car loan is secured by the vehicle, interest rates are generally lower compared to personal loans.
Fixed Term: Car loans typically have fixed terms, often between 36 and 72 months (or 3 to 7 years), allowing for predictable monthly payments.
A personal loan, on the other hand, is an unsecured loan that can be used for a variety of purposes, including buying a car. Since there’s no collateral backing the loan, personal loans often come with higher interest rates. Here are some key features of a personal loan:
Flexible Use: Unlike car loans, personal loans can be used for a wider range of expenses, from car repairs to home improvements to consolidating debt.
Higher Interest Rates: Because personal loans are unsecured, lenders charge higher interest rates to compensate for the added risk.
Loan Amount Limits: Personal loans may have lower borrowing limits than car loans, which could limit the type of vehicle you can buy.
Key Features at a Glance
| Car Loan | Personal Loan | |
| Purpose | Specifically used to purchase a vehicle | Can be used for almost any purpose |
| Collateral Required | Yes (the vehicle) | No |
| Interest Rates | Generally lower | Generally higher |
| Loan Amount | Up to the value of the car | Varies based on your credit |
| Approval Criteria | Based on your credit score and the vehicle value | Based on your credit score and income |
| Down Payment | Often required | Not typically required |
| Repayment Term | Fixed terms (usually 36-72 months) | Flexible terms (varies by lender) |
Choosing between a personal loan and a car loan depends on your financial situation. If you’re looking for a lower interest rate and can meet the specific requirements for a car loan, it’s likely the better option for buying a car. However, a personal loan might be worth considering if you need more flexibility or don’t want to use the car as collateral.
Choose a car loan if:
Choose a personal loan if:
Before making a decision, consider reaching out to a financial advisor or a member of the lending team at Marine Credit Union. We can help you explore your options and find the best loan to meet your needs. Get in touch with a Marine Credit Union lender today.