How to Get a Personal Loan for a Car: A Step-by-Step Guide

Buying a car is an expensive endeavor that often requires financing. While auto loans are the go-to option for most car buyers personal loans can also be used to purchase a vehicle. In some cases, a personal loan may even be a smarter choice than a traditional auto loan.

In this comprehensive guide, we’ll walk through everything you need to know about using a personal loan to finance a car purchase. We’ll cover the pros and cons, eligibility requirements, application process, and provide tips for getting the best rates and terms.

Overview of Personal Loans for Cars

A personal loan is an installment loan that can be used for almost any purpose, including buying a car. With a personal loan

• You’ll receive the full loan amount upfront in a lump-sum to use as you want.
• The loan has a fixed interest rate and a set repayment timeline of generally 3 to 5 years.
• Payments are made monthly until the loan balance is repaid in full.
• Personal loans can be secured or unsecured, but auto loans require the car as collateral.

While interest rates are often higher compared to auto loans, personal loans don’t impose restrictions on the vehicle’s age or mileage. This flexibility makes them useful for purchasing older used cars that may not qualify for traditional financing.

Personal loans also allow fast access to cash, require no down payment, and avoid potential repossession if payments are missed. Let’s look further at the key pros and cons.

Pros of Personal Loans

• Quick funding: Receive your funds as soon as the next business day.
• No collateral required: The loan is unsecured, so you keep the car if payments stop.
• No down payment: 100% financing means less money needed upfront.
• Flexible requirements: Personal loans work for older or high-mileage vehicles.
• Potentially lower rates: Those with great credit may find better rates than with some auto loans.

Cons of Personal Loans

• Shorter terms: Maximum terms usually top out at 5 years versus 6 or 7 with auto loans.
• Higher interest: Rates on personal loans average 10% to 28% but vary significantly by credit.
• Lower loan amounts: Lenders limit maximum borrowing based on creditworthiness.
• No incentives: Special deals like rebates or 0% APR aren’t offered.

As you can see, personal loans come with pluses and minuses to weigh. But when used strategically, they can be an affordable financing option for your next car.

Am I Eligible for a Personal Loan?

Personal loan eligibility largely depends on your credit score and income level. Each lender sets their own requirements, but here are general guidelines:

• Credit score: Most lenders require a minimum score in the mid-600s, though the higher your score, the better the rates and terms you can qualify for.

• Income: Expect to provide recent pay stubs or tax returns to prove you earn sufficient monthly income to manage the loan payments. Debt-to-income ratios of 35% to 45% are typical.

• Employment: Stable, verifiable employment of at least one year is often needed. Retirees can sometimes qualify with retirement income sources.

• Age: You generally must be at least 18 years old.

For borrowers with poor credit or limited income, securing an affordable personal loan may be challenging, but not necessarily impossible. Subprime lenders provide bad credit loans, usually at much higher interest rates and stricter terms.

Prequalifying with multiple lenders is recommended before formally applying. Comparing real rate quotes side-by-side lets you assess your true loan options. Prequalifying won’t impact your credit score.

How to Apply for a Personal Loan

If a personal loan seems right for your needs, here are the typical steps to apply:

1. Compare lenders and prequalify: Use prequalification to discover your estimated rates and loan offers across multiple lenders. Online marketplaces like LendingTree allow you to easily compare quotes.

2. Check required documents: Gather pay stubs, tax returns, a driver’s license, and any other items the lender requires as proof of identity and income source.

3. Complete the application: Apply for your chosen loan by providing all necessary personal and financial information. Double-check for accuracy.

4. Get your funds: If approved, you’ll receive your loan funds via direct deposit, often as soon as the next business day.

As you fill out your application, keep these tips in mind:

• Provide complete, accurate information to avoid processing delays or rejection.
• List all income sources you have on the application to maximize approval odds.
• Know exactly how much you need to borrow and only apply for that amount.
• Read all disclosures carefully to understand the loan’s rates, fees, and terms before signing.

The application process is quick and can usually be completed fully online in minutes. Same-day funding means you could have the cash to purchase a car off Craigslist or from a private seller right away.

Comparing Personal Loan Offers

• Interest rate: Look for the lowest rate possible based on your credit. Compare both APR and monthly interest costs.

• Origination fee: Many lenders charge 1% to 6% of the loan amount as a fee. Avoid fees over 5% if possible.

• Loan term: Longer terms from 3 to 5 years reduce the monthly payment but increase the total interest paid over the life of the loan.

• Prepayment penalties: Some lenders charge a penalty fee if the loan is paid off early. Try to avoid these.

• Total costs: Estimate the total loan costs including fees, interest, and insurance. The lowest total cost is ideal.

Using an online loan comparison tool makes it easy to evaluate multiple loan offers side-by-side. Don’t forget to also get preapproved for an auto loan as an alternative option. You can accept whichever financing provides the best rates and terms overall.

Tips for Getting the Best Personal Loan for a Car

Follow these tips to maximize your chances of getting an affordable personal loan auto financing option:

• Check your credit report: Review your credit reports for errors and dispute any inaccurate items. Improving your score could mean better loan terms.

• Limit credit applications: Too many recent credit applications can lower your scores. Only apply for the loans you need.

• Reduce debt: Pay down credit cards and other debts to lower your DTI ratio before applying.

• Bring a co-signer: Adding a cosigner with good credit may help you qualify and get better rates if you have limited credit history.

• Offer collateral: Providing collateral like a savings account reduces risk for the lender and can result in a lower interest rate on a secured personal loan.

• Shorten the term: Opt for a 3-year repayment term instead of 5 years to reduce the interest paid over the life of the loan, if you can afford higher monthly payments.

• Make extra payments: Paying just $50 extra each month can shave months off the loan and significant interest charges.

Alternatives to Personal Loans

Personal loans certainly aren’t your only option for financing a car purchase. Here are a few other routes to consider:

• Auto loans – The most common type of car loan with lower rates, longer terms, and potential rebates or incentives.

• HELOC – Allows accessing available home equity via a revolving line of credit.

• Credit cards – Potential for sign-up bonuses and rewards, but also high variable interest.

• Dealer financing – Simplified application but likely higher rates than direct lender auto loans.

Compare all avenues and run the numbers to see which works best for your budget and goals. Having a solid financing plan in place first makes for a smoother car buying experience.

The Bottom Line

When used strategically, a personal loan can be an affordable way to finance your next used vehicle purchase. Just be sure to shop around for the most competitive rates and terms for your credit profile and financial situation. Consumer credit marketplace sites simplify comparing personalized loan offers across multiple lenders with a single application.

While not ideal for all buyers and situations, personal loans are worth considering if you need fast financing, have less-than-perfect credit, or want to avoid restrictions on vehicle type and age that often come with conventional auto loans. Follow the tips above to position yourself for loan approval with the best possible rates and terms.