How Taking Out a Personal Loan Can Impact Your Ability to Get an Auto Loan

If you need to purchase a vehicle but don’t have the cash on hand, financing the car is often the most viable option. However, if your credit isn’t great or you have existing debts, qualifying for an auto loan may be difficult. In that case, you might consider a personal loan to buy the car instead. But will getting a personal loan now make it harder to get a car loan later? Let’s take a detailed look at how personal loans can impact your future auto financing options.

How Personal Loans Can Negatively Affect Your Credit

Personal loans allow borrowers to obtain cash for any purpose based on their creditworthiness. One potential downside of personal loans, however, is they can negatively impact your credit if not managed carefully. Here are some ways getting a personal loan can damage your credit:

• Hard inquiry – When you apply for a personal loan, the lender will do a hard credit check which can temporarily deduct a few points from your credit scores Too many hard inquiries in a short period can be detrimental.

• Lower credit mix – Personal loans count as “installment credit” while auto loans are “revolving credit” Having both types improves your credit mix and score,

• Higher credit utilization – If your new personal loan significantly raises your total owed credit balances relative to your available credit limits, it will increase your utilization rate which lowers scores.

• Missed payments – If you miss or are late on personal loan payments, it will show up on your credit report and hurt your credit standing with lenders.

How an Open Personal Loan Impacts Auto Loan Eligibility

Even after getting approved for a personal loan, having that additional debt obligation can make getting a car loan more challenging in the future:

• Lower debt-to-income ratio – Most auto lenders cap your monthly debt payments including the new car payment at 50% of your gross monthly income. An existing personal loan payment eats into that ratio.

• Higher total monthly debts – In addition to DTI, lenders look at your total monthly debts. A personal loan raises this figure, which could disqualify you if already high.

• Lower disposable income – The personal loan payment lowers your take-home pay available to cover a car loan payment while still affording other expenses and bills.

• Higher default risk – Having multiple debts and loan payments is seen by lenders as increasing the risk of missed payments or default, making them less likely to approve additional financing.

Strategies to Offset the Credit Impact of a Personal Loan

If you do need to take out a personal loan now but also want to get a car loan soon, there are some things you can do to mitigate damage to your credit and auto loan eligibility:

• Make payments on time – Stay current on all your credit accounts, including the personal loan, to avoid dings to your credit.

• Pay down balances – Reduce credit card and revolving balances before applying for the auto loan to lower your utilization ratio.

• Limit hard inquiries – Avoid applying for more financing until you get approved for the car loan to limit additional hard credit checks.

• Ask lenders to rerun credit – If your scores improved after taking the personal loan, ask lenders to check again when applying for the car loan.

• Apply with same lender – The personal loan lender may be more amenable to approving you again for the auto loan.

• Add a co-signer – Adding someone with better credit can help compensate for your higher debt obligations.

Will a Personal Loan Deny an Auto Loan Application?

Having an open personal loan does not automatically disqualify you from getting approved for auto financing. However, it can certainly reduce the chances of getting approved. Here are some potential scenarios:

• Lower credit score auto loans – The lender may approve you but with a higher interest rate due to the personal loan impacting your credit rating.

• Smaller loan amounts – Getting approved but for a lower loan amount because the personal loan payment eats into your DTI ratio.

• Request for co-signer – The lender asks you to apply with a co-signer who has better credit to offset the risk from your personal loan.

• Denial for financing – If the personal loan payment consumed too much of your disposable income, approval for additional auto financing may be denied altogether.

Tips for Qualifying for an Auto Loan After a Personal Loan

If you want the best shot at getting approved for a car loan despite having a personal loan, here are some tips that can help:

• Shop for the lowest rate personal loan possible to minimize the payment amount.

• Pay down other debts as much as possible to counteract the personal loan impact.

• Wait 6-12 months after getting the personal loan before applying for auto financing.

• Build your credit – increasing scores helps approval odds despite the presence of the personal loan.

• Save up a larger down payment for the car to offset the lender’s perceived risk.

• Apply with the same lender as they already approved you once despite the personal loan.

• Look for auto lenders that offer conditional approvals to demonstrate you can handle both loan payments.

Weighing the Tradeoffs of Using Personal Loans

As the pros and cons show, using a personal loan to purchase a car instead of an auto loan carries some risks. The higher interest rates, credit inquiries, and shorter loan duration could jeopardize your chances of getting approved for a car loan later when you need one.

However, personal loans remain an option if you have no other alternative to obtain funds for buying a car. As always, maintain strong financial habits, build your credit, and communicate closely with lenders to optimize your odds of qualifying down the road.

Should I Get a Personal Loan or Save Up to Buy a Car?

Beyond traditional auto financing or using a personal loan, paying cash by saving up to buy a car is also an option. Here is a quick comparison of these three approaches:

Auto loan

• Get the car immediately
• Pay interest charges but build credit
• Monthly payment is fixed expense

Personal loan

• Get cash quickly to purchase car
• Higher rates than auto loan
• Must be approved based on credit

Save up

• No loan or interest charges
• Take longer to buy the car
• Money could be invested instead

Saving up the full amount is the cheapest way to buy a car. But loans allow you to purchase the car sooner. Think about your priorities like timeline, costs, and loan eligibility when choosing which option makes sense for your situation.

What Should I Do If I Can’t Qualify for An Auto Loan?

If taking out a personal loan means you end up later unable to qualify for an auto loan, here are some potential alternatives to get the vehicle you need:

• Ask dealers about in-house financing or “buy here, pay here” options.
• Explore loans from online lenders, credit unions, or community banks.
• Have someone co-sign the auto loan to improve the chances of approval.
• Look into secured auto loan options that require collateral like a savings account.
• Save up and pay in cash for a cheaper used car.
• Determine if you qualify for any special financing programs.
• Repair your credit before reapplying to improve eligibility.

With some persistence and creativity, there are usually multiple ways to get financing for a car even if conventional lenders deny your application. Don’t give up if turned down initially.

Key Takeaways on Personal Loans and Future Auto Financing

Getting a personal loan can make getting approved for a car loan trickier and result in higher interest rates. However, with careful credit management, improving your scores, and prudent financial habits, you can offset much of the negative impact taking out a personal loan may have on future auto financing options. Your individual circumstances always play a key role as well. Discuss your situation openly with lenders to see available offers.