by Emily Hechler 
Auto Loans and Personal Loans are both common financing options for large purchases. Which one is really better for buying a car? While an auto loan is the typical answer, a personal loan could meet your needs if you aren’t able to get a car loan. Let’s look at key differences between the two types of loans.
Making a Down Payment
The first major difference is that if you want a personal loan to purchase a car, you do not need to make a down payment. While this is more cost-effective up front, it will cost you more monthly because your loan amount will be higher.
An auto loan is used to pay for the remaining balance of a car’s purchase price after the down payment. A down payment for a new car should be around 20% and around 10% for a used car. These amounts aren’t requirements but are good rules to follow. Nevertheless, a down payment of some amount is usually necessary to get an auto loan.
Using Collateral
A personal loan does not require collateral. This type of loan is referred to as unsecured. Even though you can use a personal loan to pay for a car, the car does not serve as collateral.
When you get an auto loan, your car serves as collateral. If you are no longer able make your loan payments, the lender can seize your collateral, which in this case is your car, and sell it to make up for their losses. Alltru does not want your car. That’s why we have low interest rates for our car loans. A low APR makes your monthly payments manageable.
Varying Interest Rates
Interest on personal loans tend to be higher because of the lack of collateral. At Alltru, our personal loan terms can go up to 24 months with a higher interest rate. However, our auto loan rates range from 36 months to 84 months with lower interest rates. It’s a larger risk for the financial institution to offer a personal loan than an auto loan, which is why interest is higher.
Financing a Personal Loan
One benefit of a personal loan is that you can take out a personal loan for any financial need. You don’t have to pay for a car with a personal loan. However, you can use a personal loan to pay for other car expenses. If you are in a car accident and need some money to pay for the damage, you can take out a personal loan. If you need some maintenance done all at once, you can use a personal loan for those expenses too. An auto loan can only be used to pay for the balance of the car’s purchase price. Consider an extended warranty from Alltru to cover the costs of those repairs before they happen.
Financing a Car Loan
As previously mentioned, when you purchase a car through an auto loan, you can pay it back over several years. With a personal loan, the terms are generally shorter. If you need a loan and want to pay it back quickly, a personal loan might be a better option. For example, Alltru’s auto loan terms start at 36 months but our personal loan terms max out at 24 months. Taking out a personal loan at 24 months to pay for a car would mean you’d be car payment-free after only two years!
Auto loans often have limitations on the age and the mileage of the car you want to purchase. If you want to buy a car that is already several years old, the car’s age makes it more difficult to receive approval for an auto loan. Since a personal loan isn’t designed for a car, it can be used to purchase an older vehicle that might not otherwise be approved for a car loan.
Choosing an Auto Loan
In the end, an auto loan is likely the better option to use to purchase a car because of the long and flexible terms and low interest rate. If you have poor credit, an auto loan will still likely be easier to get approval for because the car acts as collateral. When you are ready to make your car purchase, come to Alltru for a fast and easy auto loan application and approval process.
Opting for a Personal Loan
Since many lenders have restrictions for the cars they’ll finance through an auto loan, you may not be able to get one. In this case, a personal loan can help you pay for your car instead. Keep in mind that your interest rate will be higher due to the lack of collateral. Use our loan calculator to determine how much your monthly payment may be with various interest rates.
If the monthly payment will be too high for you to comfortably manage, talk to a Certified Credit Union Financial Counselor. They’ll help review your credit and finances to give you advise on how to improve your situation. This way, you can raise your credit score and save for a down payment on an auto loan with a low interest rate.
