Using Personal Loans to Finance a Car Purchase: What to Know

When it’s time to buy a new or used car, securing financing is a key part of the process for most shoppers. While auto loans are the go-to option, personal loans can also be used to cover a car purchase. This route has some potential benefits but also drawbacks to weigh.

Below we’ll explore when personal loans for cars make sense, how they compare to auto loans, pros and cons to consider and tips for getting approved post-bankruptcy or with bad credit.

When Does it Make Sense to Use a Personal Loan?

Personal loans tend to have higher rates and shorter terms than auto loans. However, there are some situations where they can be a smart financing choice:

Older Vehicles – Auto loans often limit the age of vehicles they’ll finance Personal loans provide more flexibility to buy older cars.

Bad Credit – Those with lower credit scores may have a hard time securing an auto loan Personal loans allow more options,

Fast Funding – Personal loan funds can be accessed quicker to buy from private sellers.

Lower Rates – Exceptional credit could qualify you for a low rate personal loan below auto loan options.

So if you can’t qualify for traditional auto financing, need funds fast, or find better rates, a personal loan may make sense. But run the numbers to compare overall costs before deciding.

How Do Auto Loans and Personal Loans Compare?

When used for a car purchase, personal loans and auto loans share similarities but also have key differences:

• Interest rates – Auto loans typically have lower rates, averaging around 5% for prime borrowers. Personal loan rates start higher, around 10% for good credit.

• Terms – Auto loans offer longer terms up to 72-84 months. Personal loans max out around 60 months.

• Qualification – Auto loans weigh credit heavily. Income and debt levels are bigger factors for personal loans.

• Collateral – Auto loans are secured by the car, allowing repossession if payments stop. Personal loans are usually unsecured.

• Prepayment – Personal loans can sometimes charge prepayment penalties. Auto loans do not.

As a rule of thumb, those with exceptional credit do best with a personal loan. Others may save substantially on interest with an auto loan.

Pros of Using Personal Loans to Purchase Cars

• Quick funding – Applying online can lead to fast approval and funding in days to buy a car fast.

• No down payment – Personal loans don’t require a down payment that some auto lenders expect.

• No collateral risk – Your car isn’t on the line as security if you default on an unsecured personal loan.

• Consolidate costs – A personal loan allows you to roll in the car price, taxes, fees, and insurance deductible into one easy monthly payment.

• Build credit – Making on-time payments helps strengthen your credit history.

• Lower rates – Again, those with great credit may find personal loans offer lower rates.

Potential Cons to Keep in Mind

• Higher interest – Unless you have top tier credit, expect to pay a higher rate versus auto loan options.

• Shorter terms – Maximum 5 year terms drive up monthly payments on personal loans.

• Prepayment penalties – Personal loans sometimes charge fees for paying off early that auto loans do not.

• Credit inquiries – Applying for financing requires a hard credit check, which dings your score temporarily.

• Limited amounts – Loan maximums may not be enough to buy more expensive vehicles.

Carefully weighing the pros and cons helps ensure personal loans make prudent financial sense for your situation if choosing this route.

Tips for Approval After Bankruptcy or with Bad Credit

Those with less-than-ideal credit face challenges getting approved for any financing. Here are tips to boost your odds with personal loans:

• Wait 12-24 months after bankruptcy to apply if possible

• Know your credit score and get any errors fixed

• Pay down other debts to lower your debt-to-income ratio

• Add a cosigner with excellent credit to strengthen your application

• Provide proof of your ability to repay with pay stubs, tax returns, etc

• Only apply with personal loan lenders known to work with bad credit

• Be prepared to put up collateral or accept a higher interest rate

While certainly possible to get approved, make sure the costs and risks fit within your financial means.

Alternative Ways to Buy a Car with Bad Credit

Beyond personal loans and traditional auto financing, those with less than stellar credit do have other options to purchase a vehicle:

• Secured credit cards – Build credit history with responsible use.

• Credit-builder loans – Make on-time payments to boost your score.

• Buy here, pay here (BHPH) lots – Receive financing through the dealer, often at very high rates.

• Co-signer – Have someone with good credit cosign the auto loan.

• Down payment – A large down payment shows commitment and can lead to approval.

• Peer-to-peer loans – Borrow from an individual rather than a bank.

Depending on your situation, one of these alternative strategies may help you get driving sooner than using a personal loan.

The Bottom Line on Personal Loans for Cars

Personal loans can provide financing to purchase a car in scenarios where conventional auto loans fall short. However, their higher rates and shorter terms mean they are best utilized selectively.

Carefully compare total costs to traditional auto loans and shop with multiple lenders if pursuing a personal loan. Approval is certainly achievable even with less than perfect credit through the right lender. But proceed with caution and realistic expectations to avoid overextending yourself financially.