Used cars these days typically cost more than $25,000, so financing your purchase is probably required before you can take delivery of your new vehicle. However, you may be debating whether getting a personal loan or an auto loan is preferable for buying a car.
Auto loans are generally the best option, but we can assist you in determining whether a personal loan is more appropriate for your particular circumstance.
Should I Take a Personal Loan Out to Buy a Car?
So, you’re thinking about buying a car, but you’re short on cash. Should you take out a personal loan to bridge the gap? It’s a tempting option especially with the flexibility and speed of personal loans. But before you jump in let’s weigh the pros and cons to see if it’s the right move for you.
Pros of Using a Personal Loan for a Car
- Fast access to cash: Need a car ASAP? Personal loans often come with next-day or even same-day funding, making them ideal for quick purchases. This is especially helpful if you’re buying from a private seller who needs payment upfront.
- No down payment required: Unlike auto loans, personal loans don’t typically require a down payment. This can be a huge advantage if you’re strapped for cash.
- No collateral required: Most personal loans are unsecured, meaning you don’t have to put your car on the line. This protects you from repossession if you can’t make payments, although the lender could still sue you.
Cons of Using a Personal Loan for a Car
- Higher interest rates: Brace yourself for potentially higher interest rates compared to auto loans. This can significantly increase the overall cost of your car.
- Higher monthly payments: The combination of higher interest rates and shorter repayment terms can lead to hefty monthly payments. Make sure you can comfortably afford them before committing.
- Limited amounts: Personal loan amounts are often capped based on your creditworthiness. This might not be enough to cover the full cost of your dream car, especially if you have a lower credit score.
When a Personal Loan for a Car Makes Sense
A personal loan can be a viable option if:
- Traditional financing is unavailable: Older cars might not qualify for auto loans. Personal loans can fill the gap if you’re eyeing a classic or a high-mileage vehicle.
- Your credit isn’t stellar: Subprime auto loans come with sky-high interest rates. A personal loan might offer a better deal if you have decent credit.
- You qualify for a low interest rate: If you have excellent credit, you might snag a personal loan with a rate lower than a standard auto loan. Do your research and compare offers before making a decision.
When an Auto Loan is the Better Choice
An auto loan is generally the smarter option if:
- You qualify for a low interest rate: Auto loans typically boast lower interest rates than personal loans, especially for borrowers with good credit. This can save you a significant amount of money in the long run.
- You can afford a down payment: Putting down a down payment reduces the loan amount and your monthly payments. It also shows lenders you’re serious about repayment, potentially leading to a lower interest rate.
- You want a longer repayment term: Auto loans often offer longer repayment terms than personal loans, which can make your monthly payments more manageable.
The Bottom Line: Weigh Your Options Carefully
Ultimately, the decision to use a personal loan for a car depends on your individual circumstances Consider your credit score, financial situation, and the specific car you’re looking to buy. Compare offers from multiple lenders and crunch the numbers to see which option offers the best value for your money Remember, taking on debt is a serious decision, so be sure you’re comfortable with the terms before signing on the dotted line.
When could buying a car with a personal loan make sense?
A personal loan might be the way to go if you’ve had your eye on a car listed by a private seller but lack the cash up front. Just be sure you can stick to your loan’s repayment schedule. If you default on an unsecured loan, you may be subject to severe repercussions such as credit score damage, lawsuits, and wage garnishment.
Private party loans are provided by certain auto lenders, but they can be more difficult to locate and usually have higher interest rates. A personal loan won’t have any limitations on the mileage or minimum loan amount, but auto loans used to purchase a car from a private seller might.
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. If your credit history is not good, you will pay more for any kind of loan, but if your score is below 660, you may not be able to get a personal loan. Bad credit personal loans are available, but even if you qualify, you can expect rates up to 36%.
Why Getting a Car Loan Is a Bad Idea
FAQ
Is it a good idea to get a personal loan for a car?
Do personal loans affect buying a car?
Is it normal to take a loan out for a car?
Is it better to borrow money from the bank to buy a car?
Can you buy a car with a personal loan?
But while you can use a personal loan to buy a car, in most cases, it will cost you more than if you took out an auto loan. The interest rates on personal loans tend to be higher than auto loans, and it may be more difficult to qualify for the amount you need to finance a car.
Should you take out an auto loan?
With personal loans having higher interest rates and stricter credit requirements, it may seem to make more sense to finance your car purchase with an auto loan. However, it’s still important to understand the benefits and drawbacks of this loan option. Let’s review the factors you should consider when deciding whether to take out an auto loan.
Should you buy a car if you need a loan?
Affordability: If you need a loan to cover your next car purchase, an auto loan will typically be your least expensive option. Given the likelihood of lower monthly payments and long-term interest savings, this loan option is generally more affordable.
Should I get an auto loan or a personal loan?
If a longer loan term is a priority, an auto loan is the best way to go. Larger limits. All else being equal, it’s generally easier to borrow more money when the loan is backed by collateral than when it isn’t. A borrower who easily qualifies for a $20,000 auto loan may only qualify for a $10,000 personal loan.