Is an Auto Loan Considered a Personal Loan?

Consumer lending provides individuals with access to funds for various needs. While many types of loans exist, a common point of confusion arises when distinguishing between auto loans and personal loans. Understanding the fundamental differences between these two financing options is important for consumers seeking the most suitable borrowing solution.

Characteristics of Auto Loans

An auto loan is a specific type of secured installment loan designed for purchasing a vehicle. The vehicle itself serves as collateral for the loan, meaning the lender holds a lien on the car’s title until the loan is fully repaid. Should a borrower fail to make payments, the lender can repossess the vehicle to recover the outstanding debt. Auto loans are exclusively used for acquiring new or used cars, trucks, or other motor vehicles.

These loans typically feature fixed interest rates and repayment schedules over a defined period. Common loan terms range from 36 to 84 months, with average terms for new cars around 68.6 months and used cars around 67.2 months as of early 2025. Interest rates are influenced by factors such as the borrower’s creditworthiness, the loan term, and the vehicle’s age and type. Funds from an auto loan are generally disbursed directly to the car dealership or private seller at the time of purchase.

Characteristics of Personal Loans

Personal loans, in contrast, are often unsecured, meaning they do not require collateral like a car or home. While most personal loans are unsecured, some lenders may offer secured personal loans where assets like savings accounts or certificates of deposit can be used as collateral. A primary feature of personal loans is their versatility, allowing borrowers to use the funds for almost any purpose. This can include debt consolidation, home improvements, medical expenses, or even purchasing a vehicle.

Personal loans also have fixed interest rates and regular monthly payments over a set term. Typical repayment periods for personal loans commonly range from 12 to 84 months. Interest rates on personal loans are primarily determined by the borrower’s credit score, income, and debt-to-income ratio. Once approved, the loan amount is typically disbursed directly into the borrower’s bank account.

Comparing Auto and Personal Loans

A primary distinction between auto loans and personal loans lies in their collateral requirements. Auto loans are secured by the vehicle being purchased, which acts as collateral, thereby reducing the lender’s risk. Personal loans, conversely, are typically unsecured, meaning no specific asset backs the loan, increasing the risk for the lender. This difference in collateral directly impacts the interest rates offered.

Due to the reduced risk, auto loans generally feature lower interest rates compared to unsecured personal loans. For instance, average new car loan rates were approximately 6.73% in the first quarter of 2025, while personal loan rates tend to be higher. The purpose of the funds also differentiates them, as auto loans are exclusively for vehicle acquisition, whereas personal loans offer flexibility for a wide range of uses, including a car purchase.

Regarding fund disbursement, auto loan proceeds are typically sent directly to the car seller or dealership. Personal loan funds, however, are usually deposited directly into the borrower’s bank account. Loan terms also vary, with auto loans often having longer repayment periods, commonly extending to 60 or 84 months. While personal loans can also have terms up to 84 months, they are frequently offered with shorter repayment schedules, often between 12 and 60 months.