A personal loan is a type of financing that you can obtain from a bank, an online lender, or a credit union, and that you can use for various purposes, including buying a car.
Although most people use auto loans to finance their car purchases, there are some situations where a personal loan might be a better option. For instance, you might prefer a personal loan if you don’t want to pay a down payment or if you are buying from an individual seller. When choosing a personal loan, look for one that has a low interest rate and a repayment plan that suits your budget, and that comes from a reputable lender.
- KEY TAKEAWAYS
- How to Use a Personal Loan to Buy a Car
- Also Read: Car Accident Lawyer Fees Guide 2024
- Pros and Cons of Using a Personal Loan to Buy a Car
- Pros Explained
- Cons Explained
- Personal loan vs. auto loan: Key differences
- How to Use a Personal Loan for a Car
- Benefits to using a personal loan to buy a car
- More flexibility:
- No down payment:
- No collateral:
- Drawbacks to using a personal loan to buy a car
- Higher interest rates:
- Higher monthly payments:
- May not be available to bad-credit borrowers:
- Frequently Asked Questions (FAQs)
- When Could Using a Personal Loan for a Car Make Sense?
- Buying from a Private Seller
- Having a Low Credit Score
- Can You Use a Personal Loan for a Car Purchase?
- What Credit Score Is Needed for a Personal Loan?
- How Do You Qualify for a Personal Loan?
- The Bottom Line
- A personal loan is a flexible form of financing that you can apply for various purchases, such as a car.
- Compared to personal loans, auto loans usually have lower interest rates and longer repayment terms.
- The reason why auto loans have lower interest rates is that they are secured by your car as collateral.
- It is usually more economical to use an auto loan than a personal loan to buy a car, unless you have a specific situation.
- A personal loan might be your only choice if you are buying a car from an individual seller or if you don’t have enough money for a down payment.
How to Use a Personal Loan to Buy a Car
A personal loan is a loan that does not require any collateral. You can use it for different purposes, such as paying off debt, improving your home, or purchasing a car. You need to pay back the loan with interest over a certain period of time. The interest rate and fees vary based on your lender and credit score. You can apply for a personal loan from banks, credit unions, or online lenders.
An auto loan is a loan that does require collateral. You have to use your new car as collateral. If you do not repay the loan, your lender can take your car back. You can only use an auto loan to buy a car, and usually only a car that is not older than 10 years.
Also Read: Car Accident Lawyer Fees Guide 2024
Pros and Cons of Using a Personal Loan to Buy a Car
Flexibility: You can only use an auto loan to buy a car from a dealership. If you want to buy a car from someone else, you can use a personal loan to pay for it.
Fast access: You can get the money for a personal loan in a few days if you get approved for the loan.
No collateral: Since personal loans do not need collateral, your car is secure if you do not pay back your loan. However, you should not get a personal loan if you are not confident about your repayment ability. Failing to pay back a personal loan can also damage your finances.
More expensive interest rates: Personal loans do not require collateral, so they are riskier for your lender. To reduce this risk, personal loans have higher interest rates than auto loans.
Shorter repayment periods: Auto loans usually have longer terms of up to five years or more, while personal loans have shorter terms. This means you will probably pay more each month.
Harder to access for borrowers with poor credit: Auto loans are less risky because they need collateral, so lenders can offer them to borrowers with low credit scores. To get a personal loan with a fair interest rate, you will typically need a credit score of 670 or higher, but this may vary by lender.
Personal loan vs. auto loan: Key differences
One of the main differences between personal loans and auto loans is whether they need collateral or not.
Personal loans are unsecured loans, which means they do not need any collateral. Auto loans are secured loans, which means they use the car as collateral. If you do not pay back your auto loan, your lender can take your car away.
Auto loans are less risky for the lender because they can get back what you owe by taking your car. That is why auto loan rates are usually lower than personal loan rates.
Here are some of 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)|
How to Use a Personal Loan for a Car
How to Buy a Car with a Personal Loan Buying a car with a personal loan is a simple process that involves finding a car and a lender. Here are the steps to follow if you want to use a personal loan to buy a car.
Step 1: Shop for a New Car
Before you apply for a loan, you need to know how much money you need to borrow, so decide which car you want to buy first. That way, you know the cost of the car and how much to ask for in your loan application.
Step 2: Compare Lenders
Next, shop around for the best loan offer. You should look for the loan with the lowest annual percentage rate (APR), and with monthly payments that you can comfortably afford. Your interest rate and other terms will depend on your credit score, so it’s a good idea to check your credit score before applying for a loan. You can often get pre-approved with a soft credit check, which can help you see which loans you qualify for.
Step 3: Apply
You can apply for a personal loan with a bank, an online lender, or a credit union. Most lenders will let you apply online, though credit unions will require you to join them first. The application process will involve giving your financial information and personal information such as your Social Security number and address. This information will help the lender run a credit check and evaluate your risk as a borrower.
Step 4: Use Loan to Purchase a Car
If the lender approves your application, you should get your money in your bank account within a few days. You can then use this money to pay for your new car through whatever payment methods the dealer accepts, such as a cashier’s check, a personal check, or a credit card payment.
Step 5: Make Payments
After you’ve taken out your personal loan, you’ll need to make monthly payments on it according to the terms of the agreement. If you don’t make the payments on time, your lender will likely charge you late fees. In addition, missed payments can hurt your credit score, which will affect your ability to get future loans.
Benefits to using a personal loan to buy a car
Auto loans have a specific purpose. You can only use them to buy a car and you can only borrow as much as the car costs. You also need to buy the car from a dealership, unless you get a special type of auto loan for private sellers.
Personal loans are more flexible. You can use them for almost anything, including buying a car from a dealership or a private seller.
You can also borrow more than the price of your car, but this is not a good idea. If you want to use a personal loan to buy your car, only borrow what you need to avoid extra debt.
No down payment:
Some auto loans may not need a down payment, but many do. A big down payment can also help you get lower interest rates, and it can prevent you from owing more than your car is worth.
Personal loans do not need (and are not affected by) down payments.
Personal loans usually do not need collateral, which means your car is safe if you do not pay back your loan.
If you prefer a personal loan because you are afraid of losing your car, you may want to reconsider your purchase or choose a cheaper model. Losing your car will hurt your credit and make it harder to get another car loan in the future. If you are not sure about your repayment ability, taking on more debt may not be a good idea.
Drawbacks to using a personal loan to buy a car
Higher interest rates:
Personal loans usually have higher interest rates than auto loans, even for borrowers with good credit. This means that using a personal loan for a car can cost more than using an auto loan.
Higher monthly payments:
Personal loans tend to have shorter terms than auto loans. In early 2023, the average term for a used car loan was 67.4 months, or about five and a half years. Most personal loans have terms from 12 to 60 months.
A shorter term means you will pay less interest over the loan’s duration, but your monthly payments will be higher. That is because you will have less time to repay the loan.
May not be available to bad-credit borrowers:
Personal loans do not use the car as collateral, so they have stricter requirements than auto loans. If you have a low credit score, you may not be eligible for a personal loan. Bad credit personal loans are available, but they have very high interest rates, up to 36%.
Frequently Asked Questions (FAQs)
When Could Using a Personal Loan for a Car Make Sense?
An auto loan is usually the best way to finance a car purchase because it has the lowest rates, since it uses the car as security. However, in some cases, a personal loan might be better. These include situations such as if you are buying from someone else or have a bad credit score.
Buying from a Private Seller
Auto loans are available at financial institutions and dealerships. You can use an auto loan from a bank or credit union to buy a car from someone else, but not all financial institutions offer this type of loan. So, if you are buying a vehicle from a private seller, then a personal loan might be a good option.
Having a Low Credit Score
If you have a poor credit score, you may not qualify for an auto loan. You may also have trouble getting a personal loan. However, some lenders offer personal loans for people with bad credit.
The drawback of getting a personal loan with a low credit score is that you will pay higher interest rates, which can make the loan very costly.
If possible, consider postponing your car purchase and work on improving your credit score by paying off debt and making on-time payments before you apply for either a car loan or a personal loan.1 Consumer Financial Protection Bureau. “Auto Loans.
Can You Use a Personal Loan for a Car Purchase?
You can use a personal loan for many different things, including buying a car. However, an auto loan is probably a better choice for most people, because it has lower rates by using your car as security.
What Credit Score Is Needed for a Personal Loan?
The credit score you need to get a personal loan will vary depending on the lender. Usually, you’ll need a credit score of at least 670 to be seen as creditworthy to get a personal loan with a fair interest rate.
How Do You Qualify for a Personal Loan?
When you apply for a personal loan, your lender will check your credit with a hard credit check. This can briefly lower your credit score, but this effect will go away as you repay the loan. If you pay it back on time, then your credit score will likely eventually increase.
The Bottom Line
Buying a car with a personal loan is usually not a good idea, unless you have a specific reason. Auto loans usually have lower interest rates and longer terms than personal loans. However, if you are buying a car from someone else, then a personal loan might be a good option.