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Maybe you’re feeling “stuck in second gear” as you’re weighing your options of financing a car with a personal loan or an auto loan. While generally an auto loan makes more financial sense, your situation may call for a personal loan. In this article, we’ll cover the pros and cons of each type of loan to help you decide. No matter which route you take, Space Coast Credit Union (SCCU) is here to help you get behind the wheel—and quickly! 

What is a personal loan?

 With a personal loan, you’d receive a lump sum of funds from a lender, such as a bank or credit union. Then, you’d pay back that amount over time, with interest. In most cases, personal loans are unsecured, which means they’re not tied to any collateral—such as a car you're buying—which increases the risk for the lender issuing the loan. You have free reign with what you want to do with that personal loan. For example, you could use the loan to consolidate debt, pay for a wedding, or buy a car. Lenders will usually require borrowers to meet certain qualifications before approving them for a personal loan.  

Pros of Personal Loans

Let’s take a look at the main perks of using a personal loan to finance a car: 

• Flexibility: Once you have the loan, you can use the money to buy any car you like, regardless of its age or mileage (whereas auto loan rates are typically tied to the age and mileage of the vehicle being financed). And better yet, with a personal loan, you also have the funds to buy a car from a private seller.
• No down payment: You won’t need to worry about putting down a certain amount of money to get a car with a personal loan.

Cons of Personal Loans

Here are some potential drawbacks of personal loans to keep in mind: 

• Interest rates: Since personal loans are usually unsecured, their interest rates are often higher than rates for auto loans, so you could be spending a lot more money in the long run.
• Eligibility requirements: Borrowers typically need to have higher credit scores to qualify for a personal loan.

Personal Loans at SCCU

 At SCCU, you can easily apply online for a personal loan for unsecured credit up to 3x your gross monthly income or $40,000 for up to 60 months—with no application fee! See more details here. 

What is an auto loan?

Auto loans come with one sole purpose: financing cars. These types of loans are secured, which means the car is the collateral. If the borrower isn’t able to make the car payments, the lender could repossess the car. So, auto loans are usually less risky for lenders to issue, which often means lower interest rates than personal loans.

Pros of Auto Loans

Here are the top benefits of financing with an auto loan:

• Interest rates: Generally, you can get a lower interest rate with an auto loan than you can with a personal loan, which would entail saving more money over the life of the loan.   
• Longer repayment terms: Many lenders offer personal loans with repayment terms only up to 60 months. You’ll have an easier time finding auto loans with longer terms, such as 72 or 84 months. A longer repayment term usually means a lower monthly payment. 

Cons of Auto Loans

Be on the lookout for these factors when financing a car with an auto loan:

• Down payment: With some lenders, you’ll need to have funds up front for a down payment with an auto loan.
• Car age restriction: Cars that are older or with high mileage may come with higher interest rates or be ineligible for auto loan financing with some lenders. 

Auto Loans at SCCU

You can apply for a low-rate auto loan at SCCU online—with no application fee—or ask for SCCU at the dealership. We offer flexible terms⁹ between 36 months and 84 months. Plus, we have fast approval decisions and exclusive rates for community heroes. 

When to Get a Personal Loan or an Auto Loan

Here are the key takeaways when choosing whether to finance a car with a personal loan or an auto loan.

When it’s better to buy a car with a personal loan:

• You’re getting a car that’s more than 10 years old or has more than 100,000 miles.
• You need cash for a private seller.
• You don’t have the funds or don’t want to make a down payment. 

When it’s better to buy a car with an auto loan:

• You’re buying a new car.
• You’re buying a car from a dealership (some have special discounts or rebates).
• You have so-so credit.
• You’re buying a used car less than 10 years old/less than 100,000 miles. 

Steps for Financing Your Car

The following steps can help you get the best financing for your car:  

1. Check your credit score: Simply put, the higher your credit score, the more likely you’ll get a lower interest rate for either type of loan. But, if you just have a so-so credit score, you’ll have a better chance of getting a lower interest rate for an auto loan than you would for a personal loan.

Just note that your debt-to-income (DTI) ratio also influences the interest rate you receive. You can calculate your DTI with this calculator. 

Review your credit reports for free once a year at AnnualCreditReport.com, and report any errors. You can also check your FICO^® Score in your SCCU Online or Mobile Banking account. If you’re looking to build or improve your credit, here are some ideas.  

2. Compare terms, fees, rates, and requirements at various lenders: Before you apply for a personal loan or an auto loan, do some shopping. Some, but not all, lenders will require that you make a down payment that is a certain percentage of the car’s value for your auto loan. 

3. Apply for pre-approvals: A pre-approval for an auto loan will help give you a much better idea of what you can afford. Be sure to factor in additional costs like fees and taxes into your financing amount. A pre-approval does involve a hard hit to your credit, but credit bureaus typically consider multiple applications for the same type of loan in a two-week timeframe as one hard hit.

It’s a good idea to talk to lenders about the interest rates they’re offering for personal loans and credit score requirements before applying.  Check out our guide on everything you need to know about car loans. 

Calculate the Difference

When it comes down to making a final decision, try crunching some numbers. You can enter loan amount, loan term, and interest rates for two different loans with this calculator (perhaps entering information from pre-qualification letters, pre-approval letters, or dealership offers). 

Let’s take a look at a hypothetical example, with auto loan details as “First Loan” and personal loan details as “Second Loan”:

Auto Loan: 

• Loan amount: $25,000
• Loan term: 60 months
• Interest rate: 7.49% APR* (Annual Percentage Rate)

Monthly payment = $500.82

Total interest = $5,049.80

Total cost of financing (loan amount + interest) = $30,049.80

Personal Loan:

• Loan amount: $25,000
• Loan term: 60 months
• Interest rate: 12.50% APR*

Monthly payment = $562.44

Total interest = $8,746.91

Total cost of financing (loan amount + interest) = $33,746.91

Keep in mind that this example doesn’t include a trade-in amount, down payment (if needed), fees, taxes, or insurance costs. As you can see, the auto loan offers a lower monthly payment in this situation, saving the borrower $3,000 over the life of the loan. See more of our calculators here. 

Why Finance with Space Coast Credit Union

SCCU serves members who live or work in 34 counties in Florida with more than 60 branches and Online and Mobile Banking. You can become a member with a $5 deposit in a Regular Savings account. We offer affordable car loans and personal loans, with member service throughout the life of the loan.

We’re dedicated to giving back to our communities and living up to our brand promise: Honest People. Trusted Products. Time Valued. If you have any questions, get in touch with us here, and a Team Member will be happy to assist.