These days, it’s common for used cars to cost more than $25,000, so you’ll probably need to finance your purchase before you can jump into your next ride. Still, you might be wondering if it’s better to use an auto loan or a personal loan for your car purchase.
Generally, auto loans are the best choice, but we’ll help you decide if a personal loan makes sense for your unique situation.
Buying a car is an exciting experience. But it also usually requires financing unless you have enough cash on hand. While a car loan may seem like the default option you may also want to consider a personal loan.
Personal loans allow you to borrow money for any purpose, including purchasing a vehicle. They can provide more flexibility than traditional auto financing in certain situations. However, they also come with some potential drawbacks to weigh.
In this comprehensive guide, we’ll cover everything you need to know about using a personal loan for a car purchase We’ll look at
- The pros and cons of personal loans vs. auto loans
- When a personal loan could make sense for a car
- Factors to consider before choosing this route
- Tips for getting approved and finding the best rates
How Personal Loans Work for Buying a Car
A personal loan is an installment loan, meaning you borrow a lump sum of money upfront and repay it in fixed monthly payments over a set repayment term. The interest rate and monthly payments don’t fluctuate.
Personal loans can be secured or unsecured
- Secured loans require an asset like your home or car as collateral. The lender can seize the collateral if you default.
- Unsecured loans don’t require collateral. This makes them riskier for lenders, so you’ll typically pay higher interest rates.
Most personal loans for car purchases are unsecured. Lenders will approve you based on factors like your income, credit score, and debt-to-income ratio.
Loan amounts often range from $1,000 to $50,000 or more. Repayment terms are generally between one to seven years.
Once approved, you receive a lump sum of cash to use toward buying a car from a dealer or private seller. The title can be put in your name right away since the vehicle itself isn’t collateral.
When Does a Personal Loan Make Sense for a Car Purchase?
Using a personal loan isn’t the best choice for every car buyer. But here are some situations where it could be beneficial:
1. You Need Fast Financing
With a personal loan, you may be able to get funds deposited in your account within one business day of approval. This can help if you find the perfect car from a private seller and need financing right away.
Auto loans can take longer to fund since the lender needs to approve the specific vehicle.
2. Your Credit Score Is Too Low for an Auto Loan
Lenders typically require a minimum credit score between 600 and 650 for auto financing. If your score is below that threshold, you may have better luck qualifying for a personal loan.
Some personal lenders offer bad credit loans with more flexible approval requirements. Just keep in mind rates will be much higher with poor credit.
3. You Want to Avoid Collateral Requirements
Auto loans use the purchased vehicle as collateral. That means the lender can repossess your car if you fall too far behind on payments.
With an unsecured personal loan, there is no collateral. While the lender could still take legal action if you default, they can’t seize the vehicle directly.
4. You Found a Great Interest Rate
Personal loans tend to have higher interest rates on average compared to auto loans. But borrowers with great credit could potentially qualify for a very low rate.
Before applying, check your rate preapprovals from multiple lenders to find the most competitive offers.
5. You Need a Smaller Loan Amount
Most auto lenders have minimum loan amounts between $5,000 and $10,000. Personal loans may offer lower minimums, which can help if you only need a couple thousand dollars.
Factors to Consider Before Using a Personal Loan
While personal loans can be a smart financing option in some cases, they also come with a few potential disadvantages to keep in mind:
Higher interest rates – Average rates are usually 0.5% to 2% higher compared to auto loans. Shop around for the best offers if you decide to go this route.
Shorter terms – Most personal loans max out at 5 years. Auto loans may offer 6 or 7 year terms, meaning lower monthly payments.
Prepayment penalties – Some personal lenders charge fees if you pay off the loan early. Check the fine print first.
Approval requirements – Lenders look at your income, credit score, and debts. You may not qualify if you have high debt burdens.
No special deals – Auto lenders offer special incentives like 0% APR deals that generally aren’t available with personal loans.
Weigh the pros and cons carefully based on your specific situation before making a decision. Getting preapproved by multiple personal loan lenders can help you compare real loan offers.
Tips for Qualifying for a Personal Loan & Finding the Best Rates
Here are a few tips to boost your chances of approval and lock in the lowest interest rate when using a personal loan to buy a car:
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Shop around – Compare rate preapprovals from at least 3 lenders. Online lenders often offer the most competitive rates.
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Check your credit – Good credit in the 690+ range will qualify you for the lowest rates. Review your credit reports for errors before applying.
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Lower your debt – Lenders will look at your debt-to-income ratio. Pay down balances on credit cards and other loans first.
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Bring a down payment – A 20% down payment can help you qualify and get better rate offers.
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Consider a co-signer – Adding a co-signer with good credit may help you get approved or receive a lower interest rate.
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Opt for autopay discounts – Many lenders provide interest rate reductions around 0.25% when you enroll in autopay.
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Choose shorter terms – You’ll pay less interest overall with a 3-year repayment term instead of 5 years.
Shopping around and having good credit are key to getting approved for a personal loan at the lowest possible interest rate. Make sure to compare multiple lender preapprovals.
The Bottom Line – Is a Personal Loan Right for You?
Using a personal loan to purchase a car allows fast access to financing and flexibility. It removes collateral requirements and could help those with poor credit.
However, higher rates, shorter terms, and lack of special deals may make traditional auto financing a better value depending on your situation. Carefully weigh the pros and cons and shop multiple lenders to find the right loan product at the lowest rate.
With some smart planning and research, a personal loan could be a viable option to land the car you want. But an auto loan likely makes more sense for buyers who qualify for prime rates and special incentives.
Frequently Asked Questions
Can I get a personal loan from my bank?
Many banks and credit unions offer personal loans in addition to auto loans. Banks may offer competitive rates and more flexibility on loan requirements for existing customers.
What credit score do I need for a personal loan for a car?
Most lenders require a minimum score between 580 and 640. But you’ll get the lowest rates with a score of 690 or higher. Some lenders specifically offer bad credit auto loans if your score is below 580.
How much can I borrow with a personal loan for a car?
Loan amounts range from $1,000 up to $50,000 or more based on your income, credit score, and lender maximums. Low credit scores or high debt may limit your approved loan amount.
Should I take out a secured or unsecured personal loan?
An unsecured loan is the most common choice since it doesn’t require tying up collateral. But a secured loan may offer a lower rate if you have an asset to use. Make sure the savings outweigh the risks.
Can a personal loan be used for a down payment on a car?
Yes, personal loans allow you to borrow money to use specifically as a down payment when purchasing a vehicle. Just make sure you can still afford the monthly car payments.
Using a personal loan to finance a car purchase can make sense in certain situations but also comes with drawbacks to consider. Weigh your options carefully and compare multiple lender offers if you decide to go this route. With good planning, a personal loan could provide the financing you need to score your dream car.
When could buying a car with a personal loan make sense?
If you’ve got your eye on a car listed by a private seller but don’t have the funds upfront, a personal loan could be the solution. Just be sure you can stick to your loan’s repayment schedule. If you don’t pay back an unsecured loan, you could face harsh consequences like wage garnishment, lawsuits and a damaged credit score.
Some auto lenders do offer private party loans, but they can be harder to find and typically come with higher rates. Auto loans to buy a car from a private seller may also place limits on the mileage and minimum loan amount, while a personal loan won’t come with such restrictions.
Buying a nontraditional car
Traditional auto loans are geared toward new and used vehicles that are less than 10 years old. Depending on the type of car you’re purchasing, an auto loan may not be an option. Although some lenders offer classic car financing or exotic car financing, you might instead opt for a personal loan (if the personal loan ends up being a better deal).