Personal Loans

Can You Use a Personal Loan to Buy a Car Instead of an Auto Loan?

personal loan vs auto loan

If you’re looking to buy a car, one of the biggest questions you probably have is how you’ll pay for it.

Even used cars cost upward of $19,000,  on average,  and a new car can cost much more. Unless you have that money available in savings, you’ll probably have to take out a loan.

Which brings you to an important question: Are you better off taking out an auto loan or a personal loan to buy a car?

This guide breaks down the decision, helping you figure out which option is better for your specific needs and how to find the right loan at the lowest possible cost.

Can you use a personal loan to buy a car?

Personal loan versus auto loan: 7 factors to consider

Frequently Asked Questions:

Can you use a personal loan to buy a car?

The short answer is yes, you can.

Most personal loans are provided without any restrictions on what the money is used for. This can be quite convenient, since it gives you a lot of flexibility. But it can also lead to problems, since you are free to use the loan to finance spending beyond your means.

In most situations, an auto loan is preferable to a personal loan when buying a car, This is true for a few simple reasons:

  1. It is easier to qualify for an auto loan.
  2. Your interest rate will likely be lower.
  3. You’re less likely to have to pay other loan fees.

In other words, it’s typically easier and cheaper to get an auto loan than a personal loan.

Still, it’s worth shopping around before you ever set foot on a lot

All auto-loan credit inquiries made within 30 days  , so you won’t be penalized for getting a variety of quotes on a variety of different loans.

And getting preapproved for a loan before you go to the dealer allows you to negotiate from a position of strength. With a firm loan offer in hand, you both know your budget going in and are in a better decision to negotiate, since the dealer will be motivated to try to beat the offer or risk losing your business.

LendingTree, which owns MagnifyMoney, offers tools that allow you to compare offers on both auto and personal loans from a variety of lenders online. You can find them here:


As indicated, you’ll likely find a better deal with an auto loan, but it never hurts to shop around.

Personal loan versus auto loan: 7 factors to consider

Does it ever make sense to use a personal loan to buy a car?

There are several factors you need to consider when deciding between an auto loan and a personal one.

1. Your credit score

The better your credit score, the more likely you are to qualify for favorable loan terms.

Personal loans typically call for a credit score of  500, though again, higher is better. If your credit score is lower than 580, or if you do not have sufficient credit history, you may not qualify to get a personal loan, but it’s not the sole factor considered by lenders.

Auto loans have more lenient credit requirements because the lender is protected by the fact that it can repossess your car if you default. It is possible to qualify for an auto loan with poor credit and even without any credit history at all, though it’s worth repeating: The costs will be higher and you may need a cosigner.

You can learn all about your credit score and how to find it here.

2. Interest rate

Because auto loans are secured by the vehicle, they typically offer lower interest rates than you’re likely to find with personal loans. Personal loan interest rates tend to be higher because they tend to be unsecured, though it is possible to offer collateral for your personal loan in exchange for a lower interest rate. APRs are as low as 3.99%.

If you have excellent credit, you may be able to qualify for an auto loan with a 0 percent APR through the dealer. These loans tend to have relatively short repayment periods  — no longer than 36 months  — and are often advertised on the dealer’s website.

But even if you can’t get a deal like that on the car you want, you can still find an auto loan with an interest rate ranging from 1.45 to 3.99 percent on both new and used cars. With poor credit or no credit, you’re likely looking at an interest rate of around 17.99 percent, although some subprime lenders may offer loans to people with poor credit at much higher rates.

 

3. Other fees

Auto loans can typically be obtained without any origination fee, though some may have prepayment penalties that would make it more expensive to pay your loan off early.

One common situation that arises when discussing an auto loan  with the dealer is the option to take a rebate on the purchase price or a lower interest rate on the loan. This isn’t exactly an extra fee, but making the right choice is key to minimizing the cost of the loan. Dealers will often steer you toward a lower interest rate even when the rebate will actually save you more money by reducing the amount that you are borrowing.

Personal loans are more likely than auto loans to come with both origination fees and prepayment penalties. It is possible to find personal loans without either though if you are willing to shop around.

When comparing auto loans and personal loans, it is important to compare the APR for loans with the same term. APR factors in things like the origination fee, allowing you to make an apples-to-apples comparison as long as the length of the loan is the same.

4. Loan term

Personal loans are typically offered with  repayment periods, while auto loan terms range from   (96 months)..

When comparing your options, it’s important to remember that while longer loan terms come with lower monthly payments, you will end up paying more interest over the life of the loan.

For example, using MagnifyMoney’s Personal Loan Repayment Calculator, we can see you would actually have a lower monthly payment taking out a $20,000 loan at 5 percent interest over seven years than you would with a $10,000 loan at 5 percent interest over three years ($283 compared with $300).

But you would only pay a total of $790 in interest over the life of the $10,000 loan, compared with $3,745 in interest over the life of the $20,000 loan.

Car dealers in particular will try to get you to focus solely on the monthly payment, obscuring the total cost of the loan. But whether you’re looking at a personal loan or an auto loan, you need to be a smart consumer and understand that a lower monthly payment could actually take a lot more money out of your pocket.

5. Collateral

Auto loans require collateral in the form of your car. If you default on the loan, the lender can take your vehicle as repayment.

Personal loans can be secured, but they typically are not. This means that your car is not at risk if you default on your loan.

While this may sound like a point in favor of personal loans, there are two important things to keep in mind:

  1. Using your car as collateral allows you to get better loan terms, reducing the cost of your debt.
  2. If you are seriously concerned about your ability to pay back the loan, then taking out a loan at all may not be the best idea. You should think about waiting to purchase a car, finding other ways to pay for the purchase, or buying a less expensive car in order to take on less debt.

6. Ease of application and approval

There are online tools that allow you to compare and apply for both auto loans and personal loans, providing near-instant approval. For example, LendingTree allows you to compare auto loans from multiple lenders here, and to compare personal loans here.

Both types of loans are also obtainable from traditional banks and credit unions, expanding your list of options.

Auto loans have the added advantage of additionally being offered by dealerships, giving you an extra opportunity to secure better loan terms. The key is to show up to the dealer with preapproved offers from other lenders, which will give you bargaining power.

7. Down payment

Some auto lenders will require a down payment, especially if you have poor credit. Regardless, you can often obtain a lower interest rate if you do put some money down. Furthermore, a larger down payment means a shorter loan term and more money saved on interest charges in the future.

Personal loans do not require a down payment.

Frequently asked questions:

What is a personal loan?

A personal loan is typically an unsecured loan that can be used for any purpose.

Personal loans are offered by online lenders, banks and credit unions. They typically have two- to seven-year repayment terms and APRs as low as 3.99%. Some lenders charge origination fees, and some also charge prepayment penalties, though it is possible to find loans without either.

Unlike auto loans, personal loans are unsecured, meaning that the lender cannot take your car if you fail to pay back the loan. This typically comes with the tradeoff of higher interest rates and stricter credit requirements.

Personal loans can typically be secured with a credit score of 580 or higher . The better your score, the better your loan terms will be.

What is an auto loan?

An auto loan is taken out for the specific purpose of buying a car, and the loan itself is secured by the vehicle. This means that if you fail to repay the loan, the lender can repossess your car.

This adds some risk on your end, but it typically comes with the benefit of better interest rates, lower fees and more lenient credit requirements. Because the lender has a backup plan, they can afford to provide more generous loan terms.

Auto loans can be obtained through online lenders, banks, credit unions and directly from the auto dealer. Interest rates range from 0 percent APR promotional financing provided by the dealer to 1.45 to 17.99 percent from other lenders. Check out MagnifyMoney’s list of the best auto loan rates for 2018.

Loan terms depend on your credit score, your down payment, the type of car being purchased and the amount you are borrowing. If your credit score is lacking, go here to learn how to get a car loan with bad credit.

 

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