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Can I Use a Personal Loan to Buy a Car?

Car prices remain elevated in 2023 due to the persisting impact of the pandemic. The average loan amount for a new car is now $40,657 while used car loans average $26,863, both all-time highs, according to Experian’s State of the Automotive Finance Market for the second quarter of 2023. With the cost to purchase a vehicle so high, nearly 80% of new car buyers and 38% of used car buyers are financing their purchases.

Usually, auto loans are your best bet for financing, whether through the dealership, your credit union, or another financial institution. However, personal loans are another option that may make sense under the right circumstances. It’s often possible to use money from a personal loan to buy a car, but you should be aware of the pros and cons of doing so before choosing this route.

Personal Loan vs. Auto Loan: Key Differences

The primary difference between these two loan types is collateral. Most personal loans are unsecured, and you can typically obtain one without offering up collateral. By contrast, auto loans are secured loans that require you to use the vehicle being financed as collateral. If you default on the loan, the lender can take possession of the vehicle and sell it to recover some of their losses on the loan.

Since auto loans are collateralized, they present less risk to the lender, which translates to lower interest rates on auto loans versus personal loans.

Personal Loans vs. Auto Loans

• Collateral: Personal loans can be secured or unsecured, but collateral is usually not required. Auto loans are secured by the financed vehicle.
• Loan use: Personal loans can be used for nearly any purpose, while auto loans can be used to purchase a vehicle.
• APR: Personal loans have fixed or variable interest rates that can range from single digits to 35% or higher. Auto loans can range from single digits for new and used car buyers with good credit to rates up to 20% or more for those with poor or limited credit purchasing a used car.
• Term: Personal loans range from a few months to five years, while auto loans range from 36 to 96 months.
• Down payment: Personal loans do not require a down payment, while auto loans often do.

Pros and Cons of Using a Personal Loan to Buy a Car

As with any financial decision, always weigh the benefits and downsides to help determine your best option.

Pros of Buying a Car With a Personal Loan

• No down payment: Personal loans don’t typically require you to come up with a down payment. By contrast, some auto lenders may require a down payment, especially if your credit score is low.
• No collateral required: When you purchase a car in full with cash funds from a personal loan, the car title is in your name. If you default on the loan for any reason, your lender can’t repossess your vehicle.
• Flexible use: You can use a personal loan for just about any reason, including to buy a car. If you have extra funds available after purchasing the car, you can use personal loan proceeds for other purposes.
• High borrowing amounts: Personal loan borrowing limits vary by lender and range from $100 to $100,000.

Cons of Buying a Car With a Personal Loan

• Higher interest rates: Personal loans often have lower interest rates than some forms of credit, but they usually have higher rates than auto loans and other secured loans.
• Shorter repayment terms: Personal loans are usually available in shorter terms ranging from 12 to 60 months.
• More stringent eligibility criteria: Because personal loans are unsecured and carry a higher risk than a secured auto loan, they often have stricter eligibility requirements.

When Does It Make Sense to Use a Personal Loan for a Car?

Despite the advantages of buying a car with an auto loan, using a personal loan to buy a car can make sense in certain scenarios. For example, if you’re dealing with a private seller, getting an auto loan from the dealer isn’t an option, but a personal loan may have comparable terms with a bank or credit union auto loan.

You may also prefer a personal loan if you want to purchase a car without a down payment. And since you don’t have to offer your car as collateral, a personal loan can help you avoid repossession of your car if you have trouble making your payments.

On the other hand, you should steer clear of personal loans in many situations, such as if you’re on a tight budget. Personal loans typically come with higher interest rates and shorter repayment terms, both of which could lead to higher monthly payments. And even though the loan isn’t secured by your car, your personal loan lender could garnish your wages or file a lawsuit against you to recover damages if you default on the loan.

Improve Your Credit to Lower Your Loan Costs

Whether you choose to buy a car with a personal loan or an auto loan, you’ll likely receive a lower interest rate with good credit, and generally, the higher your credit scores, the better. Before you apply, take a moment to check your credit report and credit score for free with Experian. Address any issues you discover and implement strategies to improve your credit if necessary. Even a modest increase in your credit may help you qualify for a lower rate that could save money in the long run.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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