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How is a car loan different from a personal loan?



It can be a frustrating ordeal, figuring out how to secure all the funds required to purchase the car you want or need, when you’re ready to buy. Applying for any type of loan requires some serious financial foresight and responsibility, plus research and planning.

Your reasons for getting a loan could be numerous, from wanting to finance a wedding, your post-secondary education, your next vehicle purchase or even the purchase of a new home. For most of these individual needs, there loans created specifically for the purchase category.

For example, homebuyers will seek out a mortgage loan to finance their home purchase while someone looking for help with tuition would apply for a student loan. There are loans created specifically for weddings, and those created specifically for funerals.

Most of the time, these curated loans fall under the category of a personal loan. The auto loan, however, is one quite distinct from the personal loan, which is what we’ll cover in this post.

Can you use a personal loan to buy a car?

Since a personal loan is, in effect, a loan given to you without many restrictions, you can use the borrowed money for whatever you want. Some people may use a personal loan to finance a big purchase or consolidate all of their debts into one place.

If you’re looking to purchase a car with a personal loan, you should make sure to only borrow as much as you need to cover the cost of the car. If you don’t plan ahead, you could borrow too much money, spend what you need on the car, and have leftover cash borrowed for no reason. You may spend this money in a haphazard fashion if you’re not careful, and you’ll be paying more in interest for the loan overall.

It’s important that you know how much the vehicle will cost you ahead of time, so you don’t put yourself into more debt than necessary.

So, personal loans are flexible for a range of purchases, but you might end up biting off more than you can chew if you’re not careful.

Why a car loan is best suited for vehicle purchases

Auto loans were created to fund the specific purchase of a vehicle, and are generally preferable over a personal loan for this purpose. Any car loan you qualify for will be tailored to the vehicle you want to purchase, meaning you won’t ever borrow more money than you really need to.

Plus, auto loans are easier to qualify for than personal loans, and they can have lower interest rates depending on your risk. With lower interest rates, less money borrowed, a decent down payment and credit score, a car loan can be easier to get and afford in the long run.

Secured vs unsecured loans

Personal loans are generally unsecured, meaning there is more risk to the lender if you fail to pay them their money back. Car loans are secured against the vehicle you purchase as collateral, which leads to more trust between parties and lower interest rates. The auto lender can simply repossess the vehicle and get some value back, whereas a personal lender cannot.

Consider why you need a loan in the first place

Both loan types will require a good credit score to qualify, but there will be different fees associated with each.

Personal loans tend to have origination fees and prepayment fees if you pay off your loan before the end of your term, whereas auto loans are likely to only come with prepayment fees.

Having a good down payment will make your car purchase more affordable, while shopping around for the best quote will help you negotiate with your auto dealer.