Should I use a personal loan or a car loan to buy a car?

Personal loans and car loans are both options when purchasing a vehicle, but car loans are usually the better choice because they tend to be less expensive. Car loans usually have APRs between 3% and 7%, while personal loans have a much bigger range of possible rates, at 6% to 36%. Another major difference between the two is that a personal loan can be used for just about anything, while a car loan can only be used for purchasing a car. Plus, personal loans are usually unsecured, while a car loan uses the vehicle you’re purchasing as collateral.

The average size of a personal loan is $11,700, according to LendingTree. In contrast, the average new auto loan is $32,187, and the average used auto loan is $20,137. So it’s possible you might not be able to borrow enough with a personal loan to finance your car purchase. Personal loans and car loans differ in several other major ways, too, like how long buyers have to pay them off.

Personal Loan vs. Car Loan:

Car loans are best for people who simply want to buy an automobile as inexpensively as possible, as car loans offer much lower interest rates than personal loans. Plus, the risk of repossession shouldn’t be a concern if you know that you can comfortably afford the monthly payments.

Personal loans are best for people who are willing to pay higher rates in order to have the debt be unsecured. The lender cannot take your car. Instead, they will only be able to send your debt to collections. Or, they may eventually file a lawsuit to try to garnish your bank account or wages.

Both personal loans and car loans may be available to people who have bad credit. But it’s a bit easier to get a car loan with bad credit since the lender has the power of repossession. Few reputable personal loan providers offer loans to people with bad credit. Some options include Avant and LendingPoint.

It depends. I usually use personal loans because I live in Michigan and my state has the highest auto insurance costs in the nation. Having a car loan means you need to have the highest best insurance possible because technically the bank that issues the auto loan owns the car untill you pay it off and they will demand high end insurance that can often cost more than the payment, or at least hundreds of dollars a month. Using a personal loan does cost a bit more in interest but you can choose a less expensive insurance policy and save quite a bit there. The amount you save on insurance depends on what it costs to have insurance in your state and varies a lot, so it may or may not be the best option for you.