Home American history Should you take out a personal loan or a car loan to pay off your car?

Should you take out a personal loan or a car loan to pay off your car?

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If you’re looking for a new car but don’t have enough money to buy it up front, you’re probably considering taking out a loan to help finance your purchase. Depending on your situation, a car loan or a personal loan could each be an ideal financing option.

Personal loans and auto loans are considered installment loans, which means you will make fixed monthly payments over a period of time. That said, there are several key differences between the two types of loan products that are worth knowing.

Below, Select breaks down everything you need to know about using a personal loan versus an auto loan to buy a car, taking a closer look at how interest rates, eligibility requirements and loan terms vary between the two.

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Personal Loans vs Auto Loans

The most obvious difference between personal loans and auto loans is that personal loans can be used to finance any type of purchase, whether it’s wedding expenses, home repairs or a new car. Personal loans can also be funded by lenders, credit unions and banks. If you want more flexibility when it comes to using the money to finance, a personal loan is a good choice.

Auto loans, on the other hand, can only be used to purchase a vehicle and are usually funded by a bank, credit union, or other lender. You can also go through a car dealership, who will usually partner with other lenders to give you a loan, although this can be a more expensive option. Auto loans also require a down payment, or a percentage of the loan’s value, and a larger down payment on a loan means having less principal to pay back later.

Another major difference between them is that personal loans are unsecured loans whereas car loans are considered as secured loans. In other words, car loans are backed by collateral – in this case, the car – while personal loans are not backed by anything. If you have decided to opt for an auto loan, a lender can seize your car if you are in default. However, if you fail to make the payments on a personal loan, your credit score will suffer and the lender could take legal action, which could eventually lead to them seizing your assets, including your car.

Since personal loans are mostly unsecured, they require you to have a higher credit score to qualify. Generally, you will need to have a good credit score, or a score above 670, to qualify. However, some lenders give personal loans to people with bad credit, although these types of loans carry higher interest rates.

If you have good credit, there are many personal loans available with lower interest rates and no late fees, prepayment penalties or origination fees. Select ranked LightStream Personal Loans, PenFed Personal Loans and Discover personal loans among the best personal lenders.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    3.99% to 19.99%* when you sign up for autopay

  • Purpose of the loan

    Debt consolidation, renovation, car financing, medical expenses, marriage and more

  • Loan amounts

  • Terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

PenFed Personal Loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, home improvement, medical bills, car financing and more

  • Loan amounts

  • Terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

Discover personal loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, home improvement, wedding or vacation

  • Loan amounts

  • Terms

    36, 48, 60, 72 and 84 months

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

Something else to consider: Personal loans typically have repayment terms of one to seven years, while car loans typically have repayment periods of two to seven years. If you take out a loan with a longer repayment term, it may have a lower interest rate, but you might end up paying more interest than you would on a loan with a longer repayment term. short and a higher interest rate. Use a loan calculator to determine the cost of your loan.

Both types of loans sometimes come with an origination fee, which is a percentage of the loan amount that you pay the lender for making the loan. Personal loans tend to have slightly higher origination fees, but many lenders offer personal loans without these, such as the three lenders mentioned above, as well as Marcus by Goldman Sachs Personal Loans.

Generally, it is advisable to use an auto loan to finance the purchase of a car, as these types of loans tend to have lower credit score requirements and offer lower interest rates. . According a recent Federal Reserve reportthe average interest rate for a 24 month personal loan in May 2022 was 8.73% while the average interest rate for a 60 month car loan was 4.85%, so there is definitely a difference.

Nevertheless, it is worth looking at what type of conditions you qualify for for both types of loans. Then consider the one with the lowest fees and interest rate, as well as the one with the best repayment period.

At the end of the line

Choosing between a personal loan and an auto loan to pay for a car really comes down to your financial needs. If you’re looking for a loan with a lower interest rate and don’t have the best credit rating, a car loan is a great choice. If, however, you are looking for a loan that you can use for other purposes than buying a car, a personal loan is a good option since you can use this money for a number of expenses.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.