Using Personal Loans to Buy a Car: A Complete Guide

Buying a new or used car is often one of the largest purchases individuals and families make Most people need to finance a car purchase, rather than paying cash upfront Traditionally, buyers have turned to auto loans to fund their vehicle purchases. However, in recent years, more and more people have been using personal loans to buy cars instead.

In this comprehensive guide, we’ll explain everything you need to know about using personal loans to finance car purchases. We’ll cover the pros and cons of personal loans versus auto loans, interest rates and fees, loan terms, credit requirements, and more. We’ll also provide tips on how to get the best personal loan offers when using them to buy a car.

What is a Personal Loan?

A personal loan is a fixed-term, installment loan that can be used for almost any purpose. Personal loans are unsecured, meaning they do not require collateral Lenders assess your creditworthiness and income to determine if you qualify

With a personal loan, you receive the full loan amount upfront in a lump-sum payment. You then repay the loan in fixed monthly installments over a set repayment term, typically 2 to 7 years. Personal loans have fixed interest rates, so your monthly payment stays the same.

Benefits of Using a Personal Loan to Buy a Car

Using a personal loan to purchase a vehicle offers several potential advantages compared to a traditional auto loan:

• Faster funding You can often receive personal loan funds in your account within 1-3 business days of approval. This allows you to move quickly when you find the perfect car whether from a private seller or dealer.

• No down payment: Personal loans don’t require a down payment like many auto loans do. This allows you to keep more cash in your pocket upfront.

• Fixed rates and payments: Personal loan rates and monthly payments remain steady for the life of the loan. This helps make budgeting easy.

• No prepayment penalties: Most personal loans allow you to pay off your balance early with no prepayment penalties. This can help you save on interest.

• Loosen dealer restrictions: With a personal loan, you can shop anywhere for a car, even from private sellers. You don’t need to finance on-site at the dealership.

• Retain title: With a personal loan, the title is in your name from day one. You retain ownership even if you default on payments.

• Consolidate debt: You can roll other debts, like credit cards, into your personal loan. This streamlines monthly payments into one bill at a lower interest rate.

• Build credit: Making on-time payments helps improve your credit score over time. This can open doors to better loan terms in the future.

Drawbacks of Personal Loans for Cars

However, personal loans also come with some potential disadvantages to weigh:

• Higher interest rates: Personal loans tend to have higher interest rates than auto loans, especially for borrowers with less-than-excellent credit. Shop around for the best rates.

• Shorter terms: Personal loan terms max out at around 5-7 years typically. Auto loans can be 6-8 years. The shorter term can mean higher monthly payments.

• Loan amounts: Personal loan amounts are capped based on your income, credit score, and debt-to-income ratio. The loan you qualify for may not be enough to purchase the car you want.

• Unsecured: With no collateral securing the loan, lenders see personal loans as riskier. This leads to stricter approval criteria.

• Credit inquiries: Applying for personal loans with multiple lenders leads to hard inquiries on your credit reports. Too many of these in a short period can temporarily ding your credit score.

Personal Loan vs. Auto Loan: Key Differences

Personal loans and auto loans are both viable options for financing a car purchase. Here are some of the key differences between the two:

• Interest rates: Auto loans tend to have lower interest rates, especially for borrowers with good to excellent credit scores. The average auto loan rate is around 4-6%, while the average personal loan rate is 9-12%.

• Loan terms: Auto loans can be taken out for terms up to 6-8 years. Personal loan terms max out around 5-7 years. The longer term of an auto loan means lower monthly payments.

• Amounts: Auto loans are issued for the specific purchase price of a vehicle. Personal loan amounts are capped based on your income and creditworthiness, which may limit how much you can borrow.

• Collateral: Auto loans are secured by the vehicle itself. The lender can seize the car if you default. Personal loans are unsecured by collateral.

• Credit impact: Auto loan inquiries don’t hurt your credit as much as personal loan inquiries in a short period. Too many personal loan inquiries can damage your credit score temporarily.

Credit Requirements for Personal Loans

As with any loan, your credit score and history are key factors lenders review when deciding whether to approve your personal loan application.

• Excellent credit (720+): The best personal loan rates and terms. Loan amounts up to $35,000 or more.

• Good credit (680-719): Decent rates and loan amounts. Maximum around $25,000.

• Fair credit (640-679): You may qualify for a smaller personal loan with a higher rate. Loan amounts up to $15,000.

• Poor/bad credit (below 640): Most lenders will not approve borrowers with poor credit for an unsecured personal loan. If you do qualify, expect high rates, low loan amounts, and strict credit requirements.

Improving your credit score before applying will help you land the best personal loan offer. Pay down balances, dispute errors on your credit reports, and make on-time payments on all accounts.

Getting the Best Personal Loan Rates

Personal loan interest rates vary greatly depending on your credit profile. Rates range from around 5% up to 36% for borrowers with bad credit.

Here are some tips for securing the lowest personal loan rate:

• Shop and compare rates from multiple lenders
• Opt for the shortest loan term you are comfortable with
• Choose a co-signer with excellent credit, if possible
• Provide collateral or security, if requested
• Pay down existing debts and maintain low credit utilization
• Build your credit history by making on-time payments

Even a small difference in rates can save you hundreds or thousands over the loan’s term. It pays to put in the work upfront to land the best rate possible.

Repayment Term Lengths

Personal loan terms typically fall in the range of 2 years (24 months) up to 7 years (84 months).

The longer your repayment term, the lower your monthly payment will be. However, you pay more in interest costs over the life of loans with longer terms.

Choose the shortest term you can afford to pay each month. This saves you money on interest and builds equity faster. If money is tight, opt for a longer term to make the monthly payments more affordable.

Lenders for Personal Loans to Buy a Car

Many banks, credit unions, and online lenders offer personal installment loans. Here are some of the top picks for personal loans to finance a car purchase:

• Lightstream: Loans up to $100k, terms from 24-144 months, rates from 5.49% APR

• SoFi: Loans up to $100k, terms from 24-84 months, rates from 7.49% APR

• Marcus: Loans up to $40k, terms from 36-72 months, rates from 7.49% APR

• LendingClub: Loans up to $40k, terms from 24-60 months, rates from 8.34% APR

• Upgrade: Loans up to $50k, terms from 24-84 months, rates from 7.46% APR

We recommend getting rate quotes from at least 3-5 lenders to find your best offer. Comparing loan options side-by-side helps ensure you don’t overpay.

Alternatives to Personal Loans

Personal loans provide a flexible way to finance a car. But they aren’t your only option. Here are a few other routes to consider:

• Auto loans: The traditional way to fund a car purchase. Auto loans offer lower rates and longer terms than personal loans.

• HELOC: Tap available equity in your home via a home equity line of credit. Interest is often tax-deductible.

• Credit cards: A 0% APR card lets you make payments over time without interest. Make sure to pay off the balance before the 0% intro period ends.

• Family loan: Borrow from a family member at 0% interest by drafting a private loan agreement. Make sure to carefully consider any relationship implications.

• Buy used: Consider purchasing a quality used vehicle outright in cash, avoiding financing altogether. Shop for a practical used car that fits your budget.

The Bottom Line

Personal loans provide an appealing financing option for many car buyers thanks to their flexibility, fast funding, and fixed rates. However, make sure to compare interest rates and terms vs.