Personal Loan vs. Car Loan
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Personal Loan vs. Car Loan: What Are the Differences?

In the third quarter of 2021, car debt in the US totaled $1.44 trillion. The “other” debt category, personal loans included, reached $420 billion.

One reason for those high figures is that not everyone can pay for big-ticket items, like a car, in cash. As such, many folks turn to loans to finance their purchases.

So, if you’re in the same boat, it may be time to consider doing the same.

We’ll give you a breakdown of what you need to know in this personal loan vs. car loan comparison guide, so be sure to read on.

What Is a Personal Loan?

A personal loan is a credit issued to borrowers by lending institutions, such as banks. The borrowers, in turn, receive the funds in the form of a lump sum.

One of the top reasons people take out personal loans is to cover home improvement expenses. For example, a 2020 survey found that 25% of homeowners used a personal loan to fund such projects.

That’s only one reason, though, as borrowers can use personal loans at their discretion. For instance, you can use the funds to pay for a wedding, a holiday, and yes, even a new or used vehicle.   

Personal loans are popular because they often don’t require collateral. These are what you call unsecured personal loans.

What About a Car Loan?

A car loan is specifically for financing new and used motor vehicle purchases. For example, if you take one out from a bank, you get the loan funds in a lump sum, and then you use it to pay the car in full. You then pay back the bank in increments, also called installments, for several years.

Car loans are a form of secured credit in which the vehicle itself serves as collateral. So, if you default on your payments, the lender can seize (AKA repossess) your car.

Please note that a car title loan is different from a car loan. According to TitleLoanser, a title loan is a loan that uses an asset you own as collateral or security.

So, to obtain an auto title loan, you must already own the vehicle that you’ll use as collateral. By contrast, you take out a car loan to finance the purchase of an auto you want to own.

Personal Loan vs. Car Loan Rates

One of the chief differences between a personal loan and a car loan is their interest rate. Personal loans often come with higher interest rates than auto loans.

For instance, the average 48-month US car loan interest rate in August 2021 was 5.14%. Auto loans with 60-month terms even had a lower average rate of only 4.6%. On the other hand, those for personal loans with 24-month terms averaged 9.39%.

Always Compare Loan Offers Before Signing the Dotted Line

As you learned in this personal loan vs. car loan guide, the latter is often the cheaper way to finance a car purchase. However, you can still go with a personal loan if you want to buy and own a vehicle outright.

Either way, make sure to review and compare all loan offers you get before you sign the loan contract. That way, you can choose the one with the most reasonable interest rate.

Did you like this guide? If so, feel free to browse our other auto- and financing-related tips!