Auto loans are “secured” loans. In other words, the car you buy serves as collateral for the loan, and if you fall behind on your payments the lender can take back the car. You pay off an auto loan in fixed monthly installments and, much like a mortgage, the lender retains ownership until you make the final payment.
Because auto loans are secured, they are less risky for the lender and this is reflected in the interest rate, which is usually lower than personal loan rates. Most car loans are for 36, 48, or 60 months and the shorter the term, the higher the monthly payment. Auto loans are usually made either by a bank or a car dealer, and you can usually still get one even if your credit history is spotty – though you will probably pay a higher interest rate.
Personal loans are usually unsecured and do not have to be used for any specific purpose; you use the funds at your discretion. They typically range from $1,000 to $50,000, and, like auto loans, they are paid off in fixed amounts each month.
Personal loans are made by banks or other lending institutions and have flexible repayment periods that can range from 12 to 36 months or more. The longer the loan, the less you will have to pay each month, but you will end up paying more in interest over the life of the loan.
Because there’s no collateral associated with most personal loans, lenders generally charge a higher interest rate to compensate for the greater risk they are taking. For the same reason, personal loans are also harder to get than auto loans, as lenders scrutinize potential borrowers more closely. If you don’t have a solid credit rating, there’s a good chance that you won’t qualify for this type of loan.
Finally, some personal loan providers prohibit using the loan to buy a car. A personal loan from Amex, for example, can be used only for the down payment on a car, not the entire purchase.