Can You Use a Personal Loan For a Car Purchase?
These days, it’s common for used cars to cost more than $25,000, so you’ll probably need to finance your purchase before you can jump into your next ride. Still, you might be wondering if it’s better to use an auto loan or a personal loan for your car purchase.
Generally, auto loans are the best choice, but we’ll help you decide if a personal loan makes sense for your unique situation.
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Can I use a personal loan to buy a car?
As long as you qualify for one, you can use a personal loan to buy a car.
One of the most appealing things about personal loans is their flexibility. With a handful of exceptions, you can use them for almost anything. For instance, you might not be able to use your personal loan for investing, but buying a car shouldn’t be a problem.
However, due to higher interest rates and more stringent credit requirements, most borrowers don’t use personal loans to finance car purchases. In fact, during the first quarter of 2023, borrowers only used 1.4% of all personal loans for car financing.
Personal loan vs. auto loan: Key differences
At their core, one of the biggest differences between personal loans and auto loans is collateral.
As a type of unsecured loan, personal loans don’t require collateral. With an auto loan, the car serves as the collateral — so if you don’t pay back your auto loan, your lender (also called a lienholder) can repossess your car.
Since they can recoup what you owe through repossession, auto loans are less risky for the lender. As a result, auto loan rates are typically lower than on personal loans.
Below, you’ll find the key differences between personal loans and auto loans:
|Personal loan||Auto loan|
|Loan purpose||Can be used for almost anything||Can only be used to purchase a vehicle|
|APRs||Typically higher (sometimes as high as 36%)||Typically lower (good-credit borrowers can find single-digit rates)|
|Credit score requirements||Harder to qualify for||Easier to qualify for|
|Down payment||Not required||May be required|
|Collateral||Typically not required||Required (vehicle acts as collateral)|
Benefits to using a personal loan to buy a car
Auto loans are specific. You can only use them to buy a car and you can only borrow up to the car’s purchase price. Unless you get a private party auto loan, they’re also usually only available if you’re purchasing a car from a dealership.
Personal loans, on the other hand, can be used for virtually anything. That means you can use a personal loan to buy a car from a dealership or a private seller.
You can also borrow more than the purchase price of your car, but this could spell trouble. If you decide to buy your car using a personal loan, only borrow what you need to avoid taking on unnecessary debt.
No down payment
Not all auto loans require a down payment, though many do. A large down payment might also unlock lower interest rates, and it can help you avoid becoming upside-down in your auto loan.
Personal loans don’t require (and aren’t affected by) down payments.
Personal loans can be secured by collateral, but they typically aren’t. This means your car is not at risk if you default on your loan.
If you’re leaning toward a personal loan because you’re worried about repossession, you may want to rethink your purchase or pick a less expensive model. Repossession affects your credit negatively and will make it harder to finance another car in the future. If you’re seriously concerned about your ability to pay back the loan, taking on additional debt may not be the best idea.
Drawbacks to using a personal loan to buy a car
Higher interest rates
Even for good-credit borrowers, personal loans tend to have higher interest rates than auto loans. All else being equal, using a personal loan for a car is often more expensive than financing one with an auto loan.
Higher monthly payments
Personal loans usually have shorter repayment periods than auto loans. In early 2023, the average used car loan was 67.4 months long, or a little over five and a half years. In contrast, most personal loans have terms from 12 to 60 months.
Although a shorter loan term means you’ll pay less interest over the life of the loan, your monthly loan payments will be higher. That’s because you’ll have fewer months to spread your repayment across.
May not be available to bad-credit borrowers
Since they don’t use the vehicle as collateral, personal loan requirements tend to be stricter than auto loans. While you’ll see higher interest rates on any type of loan if you have a rocky credit history, you might not be eligible for a personal loan if your score is below 640. Bad credit personal loans are available, but even if you qualify, you can expect rates up to 36%.
When could buying a car with a personal loan make sense?
Buying from a private seller
If you’ve got your eye on a car listed by a private seller but don’t have the funds upfront, a personal loan could be the solution. Just be sure you can stick to your loan’s repayment schedule. If you don’t pay back an unsecured loan, you could face harsh consequences like wage garnishment, lawsuits and a damaged credit score.
Some auto lenders do offer private party loans, but they can be harder to find and typically come with higher rates. Auto loans to buy a car from a private seller may also place limits on the mileage and minimum loan amount, while a personal loan won’t come with such restrictions.
Buying a nontraditional car
Traditional auto loans are geared toward new and used vehicles that are less than 10 years old. Depending on the type of car you’re purchasing, an auto loan may not be an option. Although some lenders offer classic car financing, you might instead opt for a personal loan (if the personal loan ends up being a better deal).
When you don’t want to make a down payment
Unless you have excellent credit or the dealership is running a promotion, you’ll probably need to make a down payment when you buy a car with an auto loan. If you use a personal loan, you can drive off the lot with no money down.
How to use a personal loan for a car
Shop around for a new car
Before applying for a personal loan, you’ll need to know how much to borrow since this form of funding is issued in a lump sum. If you borrow too little, you’ll have to cover the difference between your loan amount and the vehicle’s purchase price. If you borrow too much, you might be tempted to spend the extra money on unrelated things.
Getting an idea of the car you’d like to purchase will help you nail down the amount of money you should apply for. Keep in mind that it can take a few days before your funds are available. You may want to contact the seller ahead of time to let them know your intentions to buy.
Taking out a personal loan isn’t a decision to take lightly, and selecting the first lender you come across might land you a loan with unfavorable terms.
Many online lenders, brick-and-mortar banks and credit unions offer personal loans. Take the time to research a few, paying special attention to APRs, the length of the loan, origination fees and prepayment penalties.
After you choose a lender, you’ll need to apply for your personal loan. This process can vary, but generally, you’ll need to provide basic personal information and documents to prove your income (like paystubs or a W-2).
Use loan funds to purchase the car
Once approved, you’ll receive your loan as a lump sum, usually by direct deposit. With cash in hand, you can buy your car. If you happen to have leftover funds, it may be wise to use them for car-related matters like title transfers, registration or insurance. You could also use those funds to pay back the loan, lowering your remaining balance.
Your first loan payment will be due about 30 days after your loan is disbursed. Be sure to pay on time, every time, to avoid late fees and dings to your credit. You may even want to sign up for autopay for peace of mind (and a possible APR discount, depending on your lender).