Can you use a personal loan to buy a car?

How to use a personal loan to buy a car

A personal loan is a type of loan that is repaid with interest over an extended period of time, usually up to 60 months. Personal loans can be used for a variety of purposes, such as debt consolidation, home remodeling, vacations, school expenses and, of course, a new car.

You can typically get a personal loan from several different sources, including:

• Banks
• Credit unions
• Online lenders (like Best Egg or Upgrade)

Interest rates vary, and additional fees may apply, depending on the lender you choose and your credit score.

Personal loans vs. auto loans

An auto loan is similar to a personal loan; you receive a lump sum upfront that you pay off in installments over a set term. However, there are some differences between the two.

A personal loan is generally an unsecured loan, which means you don’t need collateral to receive funds. Auto loans are typically secured loans that use the vehicle as collateral. Should you fail to repay the loan, your lender can seize your vehicle for repayment.

Because there is less risk for the lender, auto loans tend to have lower interest rates than personal loans that don’t carry collateral. Interest rates on personal loans can reach as high as 35%, while auto loans usually top out around 20%, according to Experian. Your credit score will play a major role in the actual rate you receive.

Here are some other differences to consider as well:

Differences between personal loans and auto loans

When to use a personal loan instead of an auto loan

An auto loan can offer lower interest rates and a longer term for repayment, but there are some situations when choosing a personal loan for a car purchase might be a good idea.

• You can’t qualify for an auto loan. If you have bad credit or even new credit, you may have trouble qualifying for conventional financing.
• You’re buying from a private seller. Not all lenders will finance a private sale, so a personal loan may be your only option.
• You are buying an older car. Some lenders may not find it worth it to finance a vehicle that is too old. It isn’t uncommon for lenders to refuse a loan or impose extra loan requirements if the car is older than 10 years or has more than 100,000 miles.
• You don’t have the down payment. If you don’t have cash on hand for a down payment, a personal loan may be a better choice since none is required.
• You receive a better personal loan rate. Auto loans don’t always have the most competitive interest rate, so prequalifying for a personal loan before you apply for an auto loan can help you compare your options.

What is a good credit score to get a personal loan for a car?

A good credit score is one of the requirements of a personal loan. FICO reports that lenders typically consider scores above 670 as “good.” Some lenders offer bad credit loans that are easier to qualify for than personal loans, but it’s important to remember that bad credit loans carry higher rates.

Before applying, make sure your credit is suitable so you don’t get an unnecessary denial. If you have poor credit, it is often better to wait and work on improving your score so you can qualify for a better loan at a more competitive rate.

How to get a personal loan to buy a car

It takes just a few steps to get a personal loan to buy a car:

1. Set your budget: Figure out how much you can afford to borrow, including interest and any fees, so that the monthly payment fits comfortably into your finances.
2. Choose your car: Shop around to narrow down your options. This helps you estimate how much you need to borrow.
3. Compare lenders: Look at interest rates, loan terms and fees from banks, credit unions and online lenders.
4. Prequalify: Prequalifying shows which lenders are likely to work with your credit profile without affecting your credit score.
5. Apply: Most personal loans can be applied for online, and you’ll usually get a decision right away.
6. Look for the deposit to arrive: If you’re approved, the funds are typically transferred to your bank account within a few business days.

Once the money is in your account, you’re ready to purchase a car, whether that’s at a dealership or with a private seller.

» MORE: Best Car Loan Companies

Pros and cons of using a personal loan to buy a car

Personal loans can offer flexibility when financing a car, but they do come with trade-offs. Here’s a look at the pros and cons of using a personal loan to buy a car: