A recent study found that over 50% of people studied said they’ve taken out a personal loan; however, only about 30% stated they’ve taken out a car loan. Loans are needed sometimes to fund your interests and endeavors; however, the question is, which type of loan is better for you? 

Personal loans are certainly more popular, but does that mean they fit with what you need? That’s why we’ve investigated everything you need to know about personal loans and car loans. That way, you can decide which loan type is better for you. 

Now, are you ready to get started? Here’s an in-depth look at personal loan vs car loan: 

What’s a Personal Loan? 

A personal loan supplies the borrower with a lump sum from a lender, which is usually a bank. The lump is typically an amount between 1,000 to 50,000. The lump sum can be applied to anything the borrower needs; there are no restrictions which means you can use the loans for a wedding, house improvements, or a car.  

Now, there are two types of personal loans. The first type is a secured loan. With a secured loan, the lender holds something of high monetary value, like a car title which allows the lender to take away the collateral if the borrower doesn’t repay the loan. 

The second type of loan is an unsecured loan, meaning that the loan is given without the lender has some type of collateral. Since these loans are riskier for the lender, they tend to have higher interest rates but help you obtain a loan without giving something away of value to you.  

Interest Rates

Unsecured loans typically have higher interest rates than secured ones due to the attached collateral. Unsecured loans also have much stricter requirements, so you’ll need a better credit score. Acquiring a personal loan may be harder for you if you have a poor or bad credit score. 

After all, your credit score will affect your total loan amount and your interest rate. So the better your credit score, the more you can borrow with a lower interest rate. On the other hand, if you have a low credit score, you’ll also have a lower borrowing capacity but a high-interest rate. 

Terms of a Person Loan 

Personal loans have a strict repayment plan that’s typically issued in months. For example, some lenders give you only 12 months to repay the loan; however other lends will give you as long as 48 months to repay the loan.  

Longer loan plans will lower your minimum payment per month but increase interest over time. On the flip side, shorter payment plans have a high minimum payment but collect less interest since you’re paying the loan faster. 


  • No restrictions on how funds are used
  • Added flexibility in payments 
  • Offer high borrowing limits 


  • Higher interest rates 
  • Stricter lending requirements 
  • Higher monthly payments 

What’s a Car Loan? 

Car loans are classified as secured loans; therefore, the lender holds the title of your car until you repay the loan. If you don’t repay the loan, the lender can seize your car. 

The loan is typically paid in fixed portions to ensure the borrower can adequately pay. However, to acquire the loan, you may have to put down a large deposit to prove that you will be repaying the loan.  

Interest Rates 

Since the lender has financial control of the car, it’s seen as a secured loan, often considered a lower-risk loan. Meaning that the loan will generally offer lower interest rates. 

Most car loans have an interest of about 3% to 4%. Plus, interest rates are fixed; that way, borrowers are not subjected to a rate increase. So you’ll pay with a specific interest rate throughout the entirety of your loan. 

Terms of a Car Loan  

Some car loans are fixed at either 32, 48, or 62 months. Just like personal loans, the longer the payment period, the higher the interest rate conversely.  

Your credit score will have less of an impact on your borrowing amount or interest rate. Instead, those factors are influenced by the price of the car. 

Keep in mind that there are many ways to get a car loan. Don’t just choose a dealer loan because it’s the most convenient. Other lenders have car loans you can apply for, which may be a better deal than a dealer could give you. Investigate the terms closely to see which deal is better for you in the long run. 


  • Usually have lower interest rates 
  • Easier to acquire with a low or poor credit score 
  • Often have on-the-spot financing 


  • You won’t receive the car title until its paid off 
  • An upfront deposit is typically required   
  • May owe more than the car is worth  
  • The car can be repossessed if you don’t pay on time 

Personal Loan Vs Car Loan: Which Is Better?  

Now that we’ve broken each loan type down, let’s compare them. Below, we’ve listed a few factors about both to help you decide which one is better for you: 

Credit Score 

Personal loans are heavily influenced by your credit score, whereas car loans are not. Car loans are, instead, centered around the price of the car. 

So if you have a high credit score, you might want to choose a personal loan. After all, you may be able to get a higher borrowing amount and decent interest rate due to your high credit score.  

However, if you have a lower credit score, chances are you won’t get a high borrowing amount and will have high-interest rates. In some cases, lenders will reject your loan application simply because your credit score is so low.

Since car loans are not focused on your credit score, you’ll be able to get a better and fair deal. So, if you have a low credit score, choose a car loan over a personal loan. A car loan will give you a fixed interest rate that way; you don’t suffer from high-interest rates based on your low credit score. It gives you the best chance at having a good loan without having the consequences of poor credit. 


Personal loans are generally expected to be paid back within one to three years. On the other hand, car loans are expected to be paid within three to six years

So ask yourself, realistically, when can you pay off the loan? If you need only a year or two, a personal loan may be right for you; however, if you need more than three years, a car loan is the way to go. 

Now before you completely decide, remember that the longer the loan, the higher the incurred interest will be. So, if you want to take your time, you will pay a lower amount each month but gain more interest per month. 

Most financial experts recommend planning to repay a loan within the first two years. While you will have a higher payment, you won’t have to pay the extra interest that was gained, which means you will spend less money overall.  


Personal loans do not require collateral, of course; that means your interest rates will be higher. However, you don’t have to risk your car getting repossessed if you don’t pay continually and on time. 

For some, this is reason enough to choose a personal loan. Although, as stated earlier, you must have a good credit score and repay the loan back within a couple of years, and for some, that simply isn’t possible. 

In that case, a car loan is the best alternative which means that you won’t own the title of the car until the loan is paid back in full. While that isn’t the best scenario, it is the trade-off for not depending on a credit score. 

The Bottom Line  

Sometimes loans are needed to pay for big-ticket items; however, with different loan types, it can be hard to figure out which one is right for you. Personal loans don’t have any restrictions, but they depend on your credit score. The better your credit score, the better loan you’ll get. 

Car loans, on the other hand, are only used exclusively for paying off a car; because of that, they’re not centered around your credit score but rather the price of the car. Meaning you can have a low credit score and still get a decent loan. Although, keep in mind that with car loans, lenders will own your car to ensure you pay back the loan, so it may not be ideal for everyone. 

No one-size-fits-all, so contact us today to get a quote or find more information about a personal loan vs car loan.

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