financial negotiation

Car loan or personal loan: what's the difference?

Securing all the funds necessary to purchase the car of your dreams (or the car you need right now) can be a frustrating, tricky experience that requires quite a bit of homework.

Unless you have a nice nest egg sitting around for this rainy day, what options are out there to help you finance your car goals?

Can you use a personal loan to buy a car, or should you use the classic car loan to finance the typically expensive purchase?

Today, we’ll break down the differences of each to help you land at your preferred method of car ownership with the lowest price tag.

Can you get a personal loan and buy a car?

You surely can use the money from a personal loan to purchase a car since most personal loans come without restrictions on what you can buy with the borrowed money.

Personal loans are a flexible option for a range of purposes, but they can also be problematic when you’re only looking to purchase a vehicle with the funds – you might borrow more money than you need, and spend it beyond your means.

Just because personal loans lack restrictions, it doesn’t mean that they should be your first choice when it comes to financing a vehicle.

Why get a car loan?

Auto loans, in most scenarios, are going to be preferable over personal loans because the former will be tailored specifically for the price of the car in question.  

For starters, auto loans are easier to qualify for and they offer generally lower interest rates, costing less in the long run than personal loans. Since auto loans are strictly for vehicles, there will be fewer extra fees involved as well.

Typically, it’ll be easier and more affordable to get a car loan rather than a personal loan.

What's the difference?

There are a few key differences and similarities between a car loan and personal loan.

Both loan types will rely on a good credit score to get you a fair and affordable interest rate, however, the fees will be different.

You’re less likely to see an origination fee with an auto loan, but are more likely to see penalty fees if you’re able to pay off your loan earlier than the end of your term.

Personal loans are more likely to have both origination fees and prepayment fees if you pay your loan off faster than expected. Shopping around is the best way to find personal loans and auto loans with lower or non-existent 'extra' fees.


Collateral for an auto loan will logically be the car it has helped purchase. Personal loans don’t always have to be secured with collateral, meaning your car won’t be repossessed if you default on the loan.

Using the car as collateral usually leads to better loan terms, reducing the overall cost of debt.

Shop around

Shopping around is the surest way to get the cheapest term on a loan for a vehicle, whether it’s specifically an auto loan or a personal loan from the bank.

To get better terms on an auto loan from a dealership, for example, you should walk into their offices having a variety of other loan quotes to counter them with, helping you negotiate.

Down payments will reduce the amount you have to pay back and also reduce your interest rate on the loan. Personal loans won’t require a down payment.