Can You Get a Personal Loan For a Car? Everything You Need To Know

Getting a new car is always an exciting experience. However, paying for that new car can quickly put a damper on your excitement, especially if you don’t have enough cash on hand to cover the full cost. That’s where getting a personal loan for a car comes in.

But can you actually get a personal loan for a car purchase? The short answer is yes, you can get a personal loan to finance the purchase of a new or used car from a dealership or private seller However, there are some important things to consider before taking out a personal loan to buy a car.

In this comprehensive guide we’ll cover everything you need to know about using a personal loan to finance a car purchase. We’ll look at

• The pros and cons of using a personal loan for a car
• Compare personal loans to auto loans
• Factors that affect eligibility for a personal car loan
• Tips for getting the best personal loan rates
• Step-by-step process for getting a personal loan for a car

Let’s dive in!

The Pros and Cons of Using a Personal Loan for a Car

A personal loan is an unsecured loan that can be used for almost any purpose. The flexibility of personal loans makes them an option for financing a car purchase. However, there are some key pros and cons to consider:

Pros

• Faster application process: Applying for a personal loan is often quicker than a traditional auto loan. Lenders mainly consider credit score and income.

• No collateral required: With a personal loan, the car itself does not act as collateral. This reduces risk of repossession.

• Predictable payments: Personal loans have fixed rates and terms, meaning your monthly payment won’t fluctuate.

• Buy from private sellers: Personal loans can be used to buy a car from an individual seller, unlike most auto loans.

Cons

• Higher interest rates: Personal loans typically have higher interest rates compared to auto loans, which are secured debt.

• Shorter terms: Personal loan terms are usually 2-7 years. Auto loans can be 6-8 years for new cars. Shorter terms mean higher monthly payments.

• Lower loan amounts: Personal loan amounts top out around $35-40K in most cases, which may not cover a new car purchase.

• Credit requirements: Personal loan lenders often require good to excellent credit (660+ score). Applicants with poor credit may not qualify.

As you can see, personal car loans offer more flexibility and faster approvals but cost more compared to traditional auto financing options. Make sure to weigh the pros and cons carefully.

Personal Loan vs Auto Loan: Key Differences

Since personal loans tend to be more expensive, you may be wondering why anyone would use them instead of a standard auto loan. Here are the key differences between the two financing options:

• Interest rates – Auto loans have lower interest rates, averaging around 4-6% for new cars and 4-10% for used cars currently. Personal loan rates range from about 6-36%.

• Eligibility – Auto lenders look at your credit score but also factors like your debt-to-income ratio. Personal loan eligibility is based almost entirely on your credit score and income level.

• Loan term – Auto loan terms are typically 4-8 years for new cars and 2-5 years for used cars. Personal loans terms are shorter, usually 2-7 years.

• Prepayment penalties – Most personal loans allow you to pay off the balance early with no penalty. Many auto loans do charge prepayment penalties.

• Down payment – You typically need a 10-20% down payment for an auto loan. Personal loans do not require a down payment.

• Buying process – Auto loans require purchasing from a dealership in most cases. Personal loans allow buying from any source, including private sellers.

The shorter terms and higher rates are the main downsides of personal loans. But they offer more flexible uses and fewer restrictions for borrowers with good credit.

What Affects Eligibility for a Personal Car Loan?

As an unsecured loan product, lenders have stricter approval requirements for personal loans used to purchase a vehicle. Here are the main factors that affect eligibility:

• Credit score – For a personal loan, most lenders require a minimum credit score between 620 and 700. The higher your score, the better the loan terms will be.

• Income – Lenders want to see stable income that covers your living expenses with money left for the loan payment. Minimum income requirements vary by lender.

• Debt-to-income ratio – Your total monthly debt payments, including the new personal loan, should not exceed 40% of your gross monthly income in most cases.

• Loan purpose – Most lenders are fine with you using funds for a car purchase, but some may restrict loan purpose, so check first.

• Employment history – Steady employment helps demonstrate you can repay the loan. Self-employed may need to provide tax returns and bank statements.

Meeting the lender’s eligibility criteria is crucial for approval and securing the best personal loan interest rate possible. Checking your credit score and reports in advance is highly recommended.

Tips for Getting the Best Personal Loan Rates for a Car

Since interest rates are higher on personal loans, you’ll want to follow these tips to help secure the lowest rate possible:

• Shop around – Compare loan offers from multiple online lenders, banks, and credit unions. Avoid going with the first lender you see.

• Improve your credit – Credit scores of 720+ qualify for the lowest rates. Pay down balances and dispute errors to boost your score.

• ** shorten your term** – Opt for a shorter 2-3 year repayment term. This results in lower interest costs over the life of the loan.

• Offer collateral – Putting up an asset as collateral can lower your interest rate significantly with some lenders.

• Bring a cosigner – Adding a cosigner with good credit can help you qualify for better loan term

• Compare auto loan rates – Even if you want a personal loan, check auto loan rates to potentially use them as leverage with lenders.

Taking these steps maximizes your chance at the lowest rate on a personal loan for your car purchase.

Step-by-Step Guide to Getting a Personal Loan for a Car

If you’ve decided a personal loan is the right financing option for your car purchase, follow this process:

Step 1) Determine the loan amount needed

Add up the purchase price, sales tax, registration fees, and any other expenses. This is the total amount you’ll need to request for the personal loan. Remember loan maximums are typically $35,000 or less.

Step 2) Check credit reports and scores

It’s important to review your credit reports for errors that could be dragging down your scores. Dispute any inaccurate information to improve your scores before applying.

Step 3) Compare loan offers from lenders

Use online loan marketplaces to view multiple personalized loan offers after a soft credit check. Compare interest rates, terms, fees, and lender reviews.

Step 4) Complete the loan application

After selecting a lender, you’ll provide personal information and documents to verify income and identity. This hard inquiry will show on your credit reports.

Step 5) Use loan funds to purchase the vehicle

The loan funds will deposit into your account according to the timeline outlined in the loan agreement. You can then purchase your new car from the dealer or private seller.

Step 6) Begin making payments

Be sure to make the monthly payments on time going forward. Late or missed payments will incur fees and negatively impact your credit score.

The Bottom Line

While not as cost-effective as auto loans, personal loans allow fast financing that can be used to purchase a car from any source, including private sellers. Just be sure to compare multiple lenders to find the lowest rates and always budget properly for the monthly payments to avoid financial hardship. With the right preparation, a personal loan can be an accessible way to pay for your new car.