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Buying a new or used car is an exciting experience. However, it also requires a significant financial investment. If you don’t have enough cash savings you’ll need to finance your vehicle purchase. You may automatically think of an auto loan. But did you know that a personal loan can also be an option for financing a car?
In this article, we’ll dive into the details of using a personal loan to buy a car. We’ll compare personal loans vs auto loans, weigh the pros and cons, and help you determine if a personal loan is the right choice for your situation. Let’s get started!
When Does It Make Sense to Use a Personal Loan for a Car Purchase?
There are a few scenarios when getting a personal loan to buy a car could be advantageous:
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You can’t qualify for traditional auto financing – If your credit score is poor, you may have trouble securing a car loan, especially for an older used vehicle. Personal loans tend to have more flexible credit requirements.
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You want to act quickly on a private sale – Some personal lenders offer fast funding, even next-day in some cases. This allows you to jump on a good private sale right away.
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You find a lower interest rate – While auto loans tend to have lower rates, those with great credit could qualify for a competitive personal loan rate below 7%. Run the numbers to see which option saves more.
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You want to own the car outright – With a personal loan, the title is in your name from day one. You avoid lien issues that can come with an auto loan.
So in the right circumstances, a personal loan can be a smart way to pay for a car. But it’s not the best choice for everyone.
Personal Loan vs. Auto Loan: Key Differences
While both are installment loans, there are some important distinctions between personal loans and auto loans:
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Purpose – Personal loans can be used for any purpose, while auto loans are solely for buying vehicles.
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Collateral – Auto loans are secured by the car you’re purchasing. Many personal loans are unsecured.
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Interest rates – Average personal loan rates tend to be higher than auto loans. But individual factors like credit score impact rates.
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Loan term – Personal loans often max out at 5 years. Auto loans can be 6-7 years, meaning lower payments.
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Amount – Auto loans tend to have higher limits, which may be needed for a more expensive car.
So in many cases, an auto loan may provide more favorable terms. But for some borrowers, a personal loan is a better option.
Pros of Using a Personal Loan to Purchase a Car
Using a personal loan to buy a car has some advantages:
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Fast funding – Get your money as soon as the next business day with some lenders. Helpful if buying from a private seller.
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No down payment – Personal loans don’t require a down payment like many auto loans do. Put that cash toward other costs.
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No collateral – The lender can’t repossess the car if you default on an unsecured personal loan. But they may take other legal action.
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Convenience – Apply for one loan to cover the car and other needs like taxes, fees, repairs, etc.
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Better rates – Those with great credit could qualify for a personal loan rate that beats current auto loan offers.
Cons of Using a Personal Loan to Purchase a Car
There are also some potential drawbacks with personal loans for cars:
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Higher interest rates – On average personal loan rates are higher than auto loan rates. Shop around for the best rate.
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Shorter terms – Auto loans can be 6 or 7 years. Personal loans max out at 5 years usually, meaning higher monthly payments.
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Loan limits – Lenders impose limits on personal loan amounts. You may not be approved for enough to buy the car you want.
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Repayment difficulty – Without the collateral of the car, defaulting on a personal loan is riskier if you lose income.
So weigh the pros and cons carefully when deciding which type of loan works best for your situation. Getting pre-qualified with multiple lenders can help you compare real loan offers.
What Credit Score Do You Need for a Personal Loan for a Car?
As with any loan, your credit score will impact the personal loan terms and rates you qualify for. Here are average personal loan rates by credit score tier:
- Exceptional (760+): 5.91% APR
- Very Good (700-759): 10.07% APR
- Good (660-699): 15.28% APR
- Fair (620-659): 22.16% APR
- Poor (580-619): 26.24% APR
You can see that excellent credit in the mid-700s or higher will qualify you for the lowest rates on a personal loan. But even with fair/average credit, personal loan approval is possible if you meet the lender’s income and other requirements.
Those with very bad credit scores below 580 will have a hard time getting approved for a personal installment loan from a traditional lender. But some subprime lenders may offer bad credit personal loans, often at very high interest rates and strict repayment terms.
What Are Important Factors for Personal Loans?
When applying for a personal loan to finance a car purchase, here are key factors lenders will evaluate:
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Credit score and history – As noted above, your credit score plays a big role in determining loan approval and interest rate offered. Past issues like bankruptcies or collections can also impact approval odds.
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Income and employment – Most lenders require steady verifiable income from employment or other sources. Some may require a minimum income, such as $2,000 per month. Self-employed borrowers may need 2+ years in business.
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Current debt-to-income ratio (DTI) – Lenders look at your total monthly debt payments divided by gross monthly income. Many require a maximum DTI of 40-50% to approve a new personal loan.
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Loan purpose – Technically personal loans allow you to spend the money however you’d like. But telling the lender it is for a car may get better terms.
Meeting the lender’s requirements for these key factors will help ensure personal loan approval. It also improves your chances of getting the lowest interest rate possible.
How Much Can You Borrow with a Personal Loan for a Car?
Personal loan amounts average around $6,500 but can range from $1,000 up to $35,000 or more. Loan limits depend on:
- Your income – Higher earners can qualify to borrow larger amounts
- Your credit – Exceptional credit means higher limits
- The lender – Each lender sets their own maximum loan amounts
For financing a car with a personal loan, you’ll want to borrow enough to cover:
- Vehicle purchase price
- Taxes and DMV fees
- Registration and insurance costs
- Any repairs or modifications you plan to make
Crunch the numbers to see how much you need, and compare that to loan limits from lenders you may qualify with. This will help you determine if a personal loan is viable for purchasing the vehicle you want.
How Long Do You Have to Repay a Personal Loan for a Car?
While auto loans can stretch as long as 6-7 years, personal loan terms are shorter – usually 2 to 5 years is the maximum term. Some lenders cap terms at 3 years.
Shorter terms mean higher monthly payments. But a shorter repayment timeline also saves on interest and helps you pay off the loan faster.
When using a personal loan for a car, opt for the longest term that fits your budget. Just keep in mind prepayment penalties may apply if you pay off the loan early.
The Bottom Line – Is a Personal Loan Right to Finance a Car?
At the end of the day, weighing your specific situation and loan options will determine if financing a car with a personal loan is the right choice. For some borrowers, it is a great alternative to traditional auto financing. But for others, an auto loan or even paying cash for a cheaper used car would be a better financial move.
Carefully compare loan offers you pre-qualify for, and run the math on monthly payments and total interest costs. Also consider your plans and budget – how long do you want to pay off the car? How much can you afford in monthly payments?
And remember, newer cars with lower miles tend to have better auto financing options. Personal loans make more sense for purchasing an older used vehicle.
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- A personal loan can be a good idea to finance a used car if conventional financing isnt available or if you cant qualify for an auto loan.
- Rates can be higher and repayment terms shorter, compared to traditional auto loans.
- You may be able to avoid repossession of your vehicle if you default on a personal loan.
Unless you can pay cash, you’ll likely need to finance a vehicle. Most buyers do. However, an auto loan isn’t your only option.
Personal loans can be used for almost any purpose — including buying a car. Depending on the circumstances, it may even make more sense than getting an auto loan. That said, there are a few drawbacks to be aware of before choosing this option.
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Buying A Car With A Personal Loan- What You Need To Know
FAQ
Should I take a personal loan to buy a car?
What kind of loan is best to buy a car?
Can I borrow money to buy a car?
Can I use a personal loan to pay off a car?
Can you use a personal loan to finance a new car?
You can use personal loans for almost any type of expense, including financing a new car. Personal loans generally come with higher interest rates than auto loans because personal loans are unsecured vs. secured. While you typically don’t need to make a down payment, your lender may charge an origination fee.
Should you get a car loan or a personal loan?
The choice between a car loan and a personal loan depends on your financial situation and the purpose of the loan.Auto loans are specifically designed for financing new or used vehicle purchases, while
What is the difference between a personal loan and auto loan?
At their core, one of the biggest differences between personal loans and auto loans is collateral. As a type of unsecured loan, personal loans don’t require collateral. With an auto loan, the car serves as the collateral — so if you don’t pay back your auto loan, your lender (also called a lienholder) can repossess your car.
How do I get a personal loan to buy a car?
Get a personal loan to buy a car from a variety of lenders. Here are some of our top suggestions: Online lenders. Online lenders are known for their speed and easy process. It typically only takes a few minutes to fill out an application, and you may be able to have funds deposited into your account by the next business day.