Personal and auto loans are some of the most popular financing options for consumers. These loans are pretty different from each other but do have some similarities. Not sure which option is the right one for you? Below you will find everything you need to know about personal loans vs. auto loans.
The Basics of a Personal Loan
A standard personal loan is an unsecured loan, repaid in equal monthly installments. With these loans, the loan amounts can range quite a bit, starting at a few hundred dollars up to thousands of dollars. These loans are versatile in spending, so you can use them for almost any expense, including financing a car.
You can find personal loans with banks, credit unions, or online lenders. Online lenders will provide more flexibility if you have a bad credit score, as financial institutions like banks and credit unions have stricter credit requirements. These loans can be short-term or long-term, ranging from a few months to a few years.
To get a personal loan, you will need to have some income, be able to prove, prove your identity, and be okay with a hard credit check—one that impacts your credit scores.
The Basics of an Auto Loan
An auto loan, also called a car loan, helps finance a new or used car purchase. Many cars and vehicles cost thousands or even hundreds of thousands of dollars, so many people have to get an auto loan to finance them.
Auto loans can only be used to purchase a car or vehicle to refinance an existing car loan. Because these loans involve a vehicle, they are considered secured loans, which means that if you cannot repay your car loan, the lender will have the right to repossess the vehicle. Repayment for these loans will usually be equal monthly payments until the loan is repaid in full.
Auto lenders can include a credit union, bank, car dealership, and private lender. The repayment terms for these loans average three to five years. To get an auto loan, you will need to have income and prove your ability to repay the loan. Additionally, you will have to be okay with a hard credit check.
The Documents You Will Need for Personal Loans and Auto Loans
Because personal loans and car loans have similar requirements, the documents you will need when applying for them are the same. Here is what you will need to have to apply for one of these loans:
A Government-Issued Photo ID
A lender will need to see a valid government-issued photo ID so they can be sure that identity theft is not happening. You can use a driver’s license, state ID, passport, military ID, or permanent resident card.
Proof of Residency
Another essential part of verifying your identity includes verifying your address. To prove your address, you can use documents like pieces of mail, bank statements, utility bills, a mortgage contract, or a lease agreement.
Employment Information and Proof of Income
Lenders will also ask about whether you are employed and the income you make monthly and yearly. You don’t need a traditional job for a car loan or personal loan, but you need income. For example, you may still be able to get both a car loan and a personal loan even if you are a contractor, retired, or live off of passive income sources. To prove your income, you can use documents like bank statements, pay stubs, letters of income, etc.
Sometimes References May Be Asked About
Although this is becoming less common, some lenders may ask for professional references. This can help provide a brief idea of an applicant’s character and ultimately help determine the odds of the loan being repaid in full.
Giving Written Consent to Conduct a Hard Credit Check
Both loan options will require a hard credit check. And before a lender does that, they will need your written permission. A credit check allows lenders to pull your credit reports to view your credit history. Your credit history will have information regarding all your past credit accounts, including payment history, default, and the amount you have paid or still owe. With these details, a lender can decide on approval, the loan amount, and the interest rate on your loan.
Some Key Differences and Similarities Between Personal and Auto Loans
There are definitely differences and similarities between these two loan types, and understanding them can help you learn precisely how these loans work on a detailed level. Here are some things you should know about these loans:
Key Differences With a Personal Loan vs. Auto Loan
- Most personal loans are usually unsecured loans, while car loans are secured options.
- Car loans must be used for a vehicle purchase, while personal loans can be used for all kinds of expenses or significant purchases.
- No down payment for a personal loan —You will likely need a down payment on your car loan, while personal loans don’t need one.
- The consequences of not paying back your auto loan will involve potentially losing your vehicle (because it is a secured loan), while with a standard unsecured personal loan, you don’t have to worry about that.
Similarities Between a Personal Loan and Auto Loan
- The interest rate for the loans will be similar—Personal loan rates and average car loan interest rates tend to be in a similar range.
- Poor credit can be okay with these loans as long you have income and find the right lender.
- Car and personal loans typically will have standard Loan fees such as an origination fee, interest, and late fees if you make a late payment.
- These loans can be considered installment loans, as both auto loans and personal loans are repaid in regular monthly installments.
- You’ll likely find just as many auto loan lenders as personal loan lenders.
- Both loans will show up on your credit reports as a part of your credit history, and how you make the payments will affect your credit scores.
Which Option Is the Best Fit For Me?
Now that you know the basics about each of these loans, you may be a little closer to figuring out the best option. However, if you are still deciding, below are some tips that will help you make a final lending decision:
Auto Loans Are Usually Best When You Want to Buy a Car
Car loans are usually the best choice if you want to purchase a new or used car, regardless of whether you have bad or excellent credit. There are a few reasons for this, one being that you are likely to find unique financing options from specific dealerships or when purchasing a particular make or model. And because these loans are catered specifically for a car purchase, their repayment terms are better suited for car payment payoff. It may also be easier to track the equity you have in your car with a car loan.
Personal Loans Work Best if You Have Different Expenses
One of the most flexible parts of a personal loan is that you can use it for almost any expense. The most common reasons people take out personal loans are to pay medical-related bills, pay their monthly bills, debt consolidation, finance large purchases, travel, and more. And you can split up how you use a personal loan, so you can take care of multiple expenses.
What if I Change My Mind After Taking Out a Loan?
Let’s say you take out one of these loan options, and while repaying your loan, you decide that the loan isn’t the right option for you. There are options you can pursue. If you are close to repaying, consider simply paying off the loan. You can also look into refinancing your loan. This process involves taking out a new loan to pay for an existing one. You can get new repayment terms, interest rates, and a new lender.
Picking the Best Auto Loan or Personal Loan
Whether you are taking out a personal loan or auto loan, there are some things you should pay attention to find the best loan option. Here are some variables to pay attention to:
The Interest Rate of the Loan
The interest on a loan will be the most expensive part of borrowing a loan. And so, make sure you get a reasonable interest rate for your specific financial situation. The better your credit score, the better rates you will get; however, even with bad credit, you should compare different loan rates to find the best one.
How long or short a loan is will affect interest and affordability. Make sure you find a loan that is manageable in monthly payments but isn’t too long, so you don’t end up paying too much in unnecessary interest.
Loan Terms in the Loan Agreement
Your loan terms will give you a good idea of what your repayment will be like and what terms you must follow to abide by the loan contract. Try and find a flexible loan; for example, it has grace periods or flexibility with late payments.
The Loan Amount
You’ll want a loan that covers the entire cost of your expense or purchase. Too little may mean taking on multiple car loans or personal loans, which isn’t the best idea.
Before choosing a lender to work with, make sure you do research on them. The last thing you want is to be stuck in a loan with a lender that makes things harder for you than they have to be.