Financing with auto loans is more sensible than personal loans.

Personal Loans

Prices for both new and used cars have risen dramatically in the last year due to shortages and production shut downs during the pandemic. According to Kelly Blue Book, the average price Americans paid for new cars increased by $6,220 between 2021 and 2021. The average transaction price for a new car was $47,077 in December 2021.

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You’re not the only one who can’t afford to spend that much upfront. According to Experian’s report, in 2021 the average amount that consumers borrowed was $37280 for new cars and $25909 for used vehicles. You can buy a car with financing. The loan is usually paid back over a specified time period, typically two to seven years.

There are pros and cons to using an auto loan to finance a car

An auto loan is the best option for buying a car. They are usually more easy to get than a personal loan and may allow you to borrow more.

Griffin says that you may be able get lower rates, better terms or even a larger loan to purchase a car. A secured loan provides more security for the lender and is more open to taking on more risk.

Lower interest rates are common for auto loans. Experian found that the average interest rate on a new car loan was 4.5% in 2021. According to the Federal Reserve, however, personal loans had an average interest rate of 9.09% in the same time frame.

The down side? The downside? Some lenders may place restrictions on what makes, models, ages, and mileage vehicles are eligible for financing.


  • It is easier to get a loan
  • Lower interest rates are common
  • You may be eligible for special incentive programs

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  • Possession risk
  • There are limitations on vehicles that are eligible
  • Usually, a down payment is required
  • There are pros and cons to using a personal loan to finance a car

Experian’s senior director of consumer education Rod Griffin says that while auto loans offer the most benefits for car buyers in most cases, personal loans can be a good option in some situations.

Auto loans can have higher minimum loan amounts than personal loans. Personal loans might be better if you need only a small amount. If you have $8,000 cash and are buying a $10,000 car, you can use a personal loan for the $2,000 balance. This is something you might not be able do with an auto loan.

Griffin says that personal loans are sometimes appropriate for classic or collectible cars. “These vehicles are not available financing by all auto loan lenders.”

Many auto loan lenders place restrictions on the vehicles that are eligible. Vehicles must be less than 10 years old and less than 120,000 miles. A personal loan may be an option for older cars that don’t conform to these requirements.


  • There are no restrictions on the type of vehicle
  • No collateral required
  • There is no down payment


  • May have higher interest rates
  • Income eligibility and credit requirements are more stringent
  • It is possible that cosigners are not allowed

Additional considerations

There are additional factors to consider when deciding whether to use an auto loan or a personal loan to finance your vehicle.

Dealer vs. outside Financing

It pays to shop around when it comes to auto financing. J.D. Power’s 2021 study found that 45% of consumers shop around for auto financing. According to J.D. Power’s 2021 study, 45% of consumers conduct research before financing a vehicle. Your bank or credit union may offer better rates than the dealer’s financing department.

To get an idea of the rates and terms available, it is a good idea to pre-qualify with another lender before you visit the dealership. This will allow you to compare offers and even negotiate once you are at the dealership.

Comparing financing offers from different sources is the best way to ensure you get a great deal. To ensure that you are comparing apples with apples, make sure to include all costs of borrowing, including interest rates and fees.

Manufacturers’ Promotions

You may qualify for manufacturer promotions depending on which make and model you are buying. To take advantage of these offers, you will need to finance your vehicle through a qualified dealership.

You could be eligible for 0% APR or a low APR for a certain period, cash back, rebates from manufacturers, and so on. These offers are usually not combinable, so you might have to choose between cash back or 0% APR. Make sure you read all the details and compare the numbers to determine which offer is best for your situation.

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Auto loan refinancing is an option, but you should not take out a loan at a higher interest rate in order to get discounts. Prepayment penalties may be charged by some lenders if your loan is not paid off before the original term ends. This could negate any savings that you might get from refinancing to lower interest rates. These details can be found in your loan contract.

If you are upside down on an existing auto loan, most companies won’t let you refinance. This means that you owe more on the car than it is worth. New cars appreciate quickly, about 20% within the first year, according to CARFAX. This may make it difficult to refinance if your current payments are not sufficient to compensate for the loss. Refinances may not bring about a significant change in your interest rate if your credit score isn’t good.

Which loan type is best for financing a car?

It’s crucial to research your financing options before you shop for a vehicle. An auto loan or personal loan may be available to you, but it all depends on your credit score and what type of vehicle you are buying. Because of their lower rates and strict credit requirements, auto loans are generally the best option. If you are buying a classic or older car or only need to borrow a small amount, auto loans may be the best option. A personal loan might be better suited for these cases.

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It doesn’t matter what kind of financing you use. Before you go to a dealership, make sure you check your credit and budget. Griffin says, “Make sure you’re able to afford a car. Not just the monthly payments, but also maintenance and insurance.”