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Should You Take Out a Personal Loan or an Auto Loan to Pay Off Your Car?

Finance | 10/05/2022 22:00
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If you are having trouble making your car payments, you may have had the idea to pay off your auto loan with a personal loan. After all, it would give you the chance to change your APR and possibly lower your monthly payments. 

But is it a good idea?

Let’s talk about the differences between personal loans and auto loans, and whether or not you should use a personal loan to pay off an auto loan.

What is the difference between a personal loan and a car loan?

Personal loans and car loans are two very different loan types. A personal loan can be used for just about anything, from a home project to debt consolidation. You can even use the money for a vacation (although we don’t recommend that). Personal loans are unsecured, which means they have no collateral. Lenders look at your credit score and financial history when determining whether or not they will give you a personal loan.

Since personal loans do not have collateral, there is nothing for the bank to repossess if you fail to make payments. Instead the lender can take you to court to get their money back, and they can severely damage your credit. Defaulting on a personal loan can ruin your credit score for years to come. But because there is no immediate ramification for nonpayment, unsecured loans tend to come at higher rates since they are riskier for the lender.

Personal loans typically do not require a down payment, but they often come with high origination fees (this is essentially the fee to do business with them).

Car loans on the other hand are secured loans, meaning that the car itself acts as collateral. If you fail to make your payments, the bank will repossess your car. Since they are secured loans, car loans will typically have lower interest rates than personal loans.

Car loans usually require down payments. They will also have origination fees, but they are usually a smaller percentage than those on personal loans.

Should I use a personal loan to pay off an auto loan?

There are times when it might be tempting to pay off your existing auto loan with a personal loan. This is especially true if you did not get a good car loan APR when you originally financed your car. Here are the pros of paying off your car loan with a personal loan:

  • You may qualify for a lower APR.

  • You can adjust your repayments period to make your monthly payments lower.

  • You can remove a cosigner from your loan.

But, there are also some cons to paying off your car loan with a personal loan.

  • You may not find a lower APR.

  • You may pay a lot in fees.

  • You may end up paying more in the long run.

Chances are you will not be able to find a lower interest rate for a personal loan than you will for an auto loan. But there’s good news–refinancing your car loan might be your best option. This gives you all of the benefits of paying off your loan with a personal loan, but chances are you will be able to find a much lower car loan APR than personal loan APR.

How can I get a better rate on my car loan?

Instead of getting an unsecured personal loan to pay off your car loan, you will be much better served to refinance your existing car loan. When you refinance, you are getting a new loan that will pay off your existing loan. The difference between refinancing and getting a personal loan is big: when you refinance, you get an auto loan, not a personal loan. This means the loan will be secured and you will get a much better rate. 

The best part is that refinancing is really easy–especially when you use a company that specializes in car loan refinance. Just follow these simple steps and start saving money immediately.


Do your research to find out which lenders will be a good fit for you. Ask around to friends and families to see if they have any lenders they recommend. Be sure to consider traditional banks, credit unions, and online lenders. You will not be able to compare specific rates and terms, but you can get an idea of what their average rates may be and how satisfied their customers are.


Once you have selected 3-5 lenders, submit all of your applications in a fourteen day window. Credit bureaus give a fourteen day window where all applications will count as one hard inquiry on your credit report. This allows you to shop around without racking up a lot of hard inquiries (which will negatively affect your score). When you apply, you will need to have the following documents ready:

  • A Photo ID, typically a driver’s ID or passport.

  • Your vehicle’s information, such as the bill of sale, VIN number, make, model, and year of your car.

  • Proof of income and financial history, such as pay stubs, banking information, and your credit report.  

  • Proof of residence, such as a mortgage statement, lease agreement, or utility bill. 

  • Proof of insurance.

This process is super easy if you use a company that specializes in car loan refinance, like Auto Approve. They have relationships with lenders across the country which means that they can get you the most competitive rates out there. They can help you handle the repetitive paperwork and make applying super easy.


After you apply, you will start seeing offers roll in. Be sure to compare the following terms when determining what auto loan is best for you:

  • Car loan APR

  • Repayment period

  • Fees

  • Customer satisfaction ratings

Auto Approve can help you compare and decide what lender might be the best fit for you. Take all of these factors into account, but pay most attention to the car loan APR. After all, you will save the most amount of money by reducing your car loan APR. 

Sign and Save.

Once you decide which car loan is the best fit for you, you can sign on the dotted line and start saving money. Your new lender will pay off your old loan (although it never hurts to call and make sure this happens without incident). You will need to alert the DMV of this change and call your insurance company, but after that you are all set. 

That’s why you should refinance your car loan instead of paying off your existing loan with a personal loan.

Refinancing your car loan can be beneficial to you for many reasons. Lower monthly payments, a lower APR, and the ability to add or remove a cosigner are just a few. If refinancing your car loan sounds like a good move for you, don’t wait–get started with Auto Approve today and get your free quote!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.