Short answer: an auto loan is secured by the car, so it usually comes at a lower rate; in August 2026 commercial banks averaged 7.54% on 60-month new car loans and 11.90% on 24-month personal loans (Federal Reserve G.19). The trade-off is that the car is the collateral. A personal loan does not put the car up as collateral, but on the example below it costs $2,564.40 more in interest over the same term. Your own rates depend on your credit, the car and the lender, so compare real quotes.
How the two loans differ
| Auto loan | Personal loan | |
|---|---|---|
| Collateral | The car | None; the lender relies on your credit and income |
| If you stop paying | The lender can repossess the car | Late payments can be reported, and the lender can use collection or sue |
| Average rate, August 2026 | 7.54% (60-month new car) | 11.90% (24-month) |
| Who you can buy from | Ask the lender which sellers it finances | The money is paid to you, so you pay the seller |
Collateral and default rows: CFPB (CFPB). Rates: Federal Reserve (G.19); the personal loan average is for 24-month loans, and a longer personal loan may be priced differently. The full secured vs unsecured comparison is in secured vs unsecured personal loans.
$20,000 car: what each loan costs
Example only, our calculation: $20,000.00 borrowed, no fees, fixed monthly payments, interest counted monthly, using the August 2026 averages above. A personal loan may also carry an origination fee, which would add to its cost.
| Loan | Payments | Total paid | Interest |
|---|---|---|---|
| Auto loan, 60 months at 7.54% | 60 x $401.14 | $24,068.40 | $4,068.40 |
| Auto loan, 72 months at 7.17% | 72 x $342.62 | $24,668.64 | $4,668.64 |
| Personal loan, 60 months at 11.90% | 60 x $443.88 | $26,632.80 | $6,632.80 |
| Personal loan, 36 months at 11.90% | 36 x $663.33 | $23,879.88 | $3,879.88 |
Loan payment: P x r / (1 - (1 + r)-n), r = APR / 12, rounded to the cent.
- On the same 60 months, the auto loan's lower rate costs $2,564.40 less in interest on this example.
- A shorter term costs less interest overall but raises the monthly payment; a longer one lowers the payment but costs more interest and can leave you owing more than the car is worth for longer (CFPB).
- Get a quote from a bank or credit union before you go to the dealer, so you can compare it with the dealer's financing (CFPB).
Watch what gets added to the loan
Add-ons such as extended warranties or service contracts, GAP insurance, credit insurance and debt cancellation products are optional, and their price is negotiable; if you add them to the loan, both your payment and the amount you repay go up (CFPB). An extended warranty cannot normally be required (CFPB).
Example only, our calculation: adding a $1,500.00 add-on to the 60-month auto loan above raises the payment from $401.14 to $431.22, which is $30.08 more a month and $1,804.80 more over the loan: the $1,500.00 itself plus interest on it.
The car loan interest deduction
For 2025 through 2028, you may be able to deduct up to $10,000 a year of interest on a loan used to buy a new vehicle for personal use that had its final assembly in the United States. The loan must have been taken out after December 31, 2024 and be secured by a lien on the vehicle; used vehicles and leases do not qualify, the deduction phases out above $100,000 of modified adjusted gross income ($200,000 for joint filers), and you must put the vehicle's VIN on your return (IRS). An unsecured personal loan is not secured by a lien on the car, so by these rules its interest would not qualify; an auto loan on a qualifying car may. Check the full rules with the IRS or a tax professional. This is general information, not tax advice.
If you fall behind
With an auto loan, the car is at risk. The CFPB says that in many states a lender can repossess a car after a missed payment without a warning or a court order, while other states require a notice first (CFPB). With a personal loan the car is not collateral, but missing payments still has consequences (CFPB); see missed a personal loan payment. A loan that uses a car you already own as collateral for cash is a different product; see vehicle title loan risks. This is general information, not legal advice.
Which fits
- An auto loan fits when you want the lowest rate and the payment fits your budget with room to spare.
- A personal loan can fit when the car or the seller is one an auto lender will not finance, or when you would rather not have the car as collateral, and you accept the higher cost.
- Either way, compare the APR and the total you will repay, not only the monthly payment.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- Federal Reserve: G.19 Consumer Credit (released October 7, 2026), terms of credit, August 2026: commercial bank new car loans (60 and 72 months) and 24-month personal loans
- CFPB: Differentiating between secured and unsecured loans (educator guide, PDF)
- CFPB: What things can I negotiate when shopping for a car or auto loan?
- CFPB: What are the differences between a manufacturer's warranty and an extended vehicle warranty or service contract?
- CFPB: What happens if my car is repossessed?
- IRS: Working Families Tax Cuts: Tax deductions for working Americans and seniors (No Tax on Car Loan Interest)