Personal Loans vs. Car Loans. The Difference


You may need to borrow money to pay for a large purchase, such as a car. Most loans come in the form of auto loans and personal loans. If you meet their specific loan criteria, they may have it very easy.

Here's how to differentiate the two? A personal loan can be used for various things, such as buying a car, but a car loan is only for buying a vehicle. Each loan has its pros and cons, which should be weighed and compared before signing up.

Auto Loans vs Personal Loans

Personal loan

A personal loan gives a borrower a sum of money from a lending organization (usually a bank) that they can use in any way they like, such as B. for a wedding, vacation, or home repairs.

If you default on your personal loan, lenders can confiscate your valuables to cover damages like your home or car. However, most opt for an unsecured loan, which means the loan is not backed by anything.

The loan term and interest rate are two important factors that affect the total loan amount. A personal loan calculator will help you determine how these variables affect your monthly payments.

Interest expense

Interest rates on unsecured loans are generally higher than on secured loans. Unsecured personal loans have stricter approval criteria, so you need an excellent credit history to qualify. If your home is in poor condition, you may not be able to get a personal loan.

Your credit rating affects the interest rate and loan amount, which may be variable or fixed. The higher your credit rating, the more borrowing power you will have and the cheaper your interest rate will be. Conversely, the lower your credit rating, the less loan you can borrow and the higher the interest rate.


Personal loans have a fixed repayment period expressed in months - 12, 24, 36, etc. Longer loan terms reduce monthly payments, but you'll pay more interest through your loan history. Shorter loan terms indicate higher monthly repayments but lower total interest because the principal is repaid earlier.

Most lenders accept online personal loan applications, and auto loans are usually accepted at dealerships.

Car loan

The vehicle you want to buy can be used as collateral for a car loan. If you default on your loan, the lender has the right to repossess your vehicle. The lender will hold your vehicle until you make your final payment, similar to a mortgage. The debt is repaid in scheduled instalments throughout the term of the loan.

Before heading to the dealership, consider using a car loan calculator to find out the best interest rate and repayment term for your needs.

Interest expense

Since the lender controls the car (secured loan), the debt is seen as less risky, giving the borrower a cheaper interest rate. Borrowers are less vulnerable to the growth associated with uninsured personal loans due to fixed interest rates.


Interest rates are usually lower.

Bad credit history is easier to get

Often an easy financing option "on the spot".


The car becomes your property only after the final payment has been made.

Getting a loan usually requires a down payment.