Can You Use a Personal Loan To Buy a Car?
- You can use a personal loan to buy a car, but most people use auto loans.
- Auto loans are typically cheaper than personal loans because they use the car as collateral.
- A personal loan for a car could make sense if you’re buying from a private seller, getting a nontraditional car or don’t want to make a down payment.
Can I use a personal loan to buy a car?
As long as you qualify, yes, you can use a personal loan to buy a car.
You can use a personal loan for almost anything, but it’s unusual to get a personal loan for a car. In fact, the most recent data shows that only 1.6% of borrowers use a personal loan to buy a car.
More people choose auto loans over personal loans because auto loans tend to be cheaper and easier to get.
Generally, auto loans are the best way to borrow money for a car, but we’ll help you decide if a personal loan makes sense for your unique situation.
Personal loan vs. auto loan
The biggest difference between auto loans and personal loans? Collateral. Personal loans don’t require it, but auto loans are backed by the car itself. If you stop making payments, the lender can repossess your car.
Since auto lenders can repossess and sell your car if you don’t repay your loan, car loans tend to come with lower rates and easier eligibility requirements.
Here are more differences between personal loans and auto loans:
| Personal loan | Auto loan | |
|---|---|---|
| Purpose | Can be used for almost anything | Can only be used to buy a car |
| Cost | Typically more expensive (APRs can be as high as 36%) | Typically cheaper (good credit borrowers can get single-digit rates) |
| Credit requirements | Harder to qualify for | Easier to qualify for |
| Down payment | None | Typically required |
| Collateral | Typically not required | Typically required (car acts as collateral) |
Pros and cons of using a personal loan to buy a car
- Flexibility. You can use a personal loan for anything, including taxes and dealer fees. With an auto loan, you can only borrow up to the car’s purchase price, and you may need to buy from a dealership.
- No down payment. Personal loans don’t come with down payments, while many auto loans require them.
- No collateral. Personal loans usually don’t require collateral. This means your car is not at risk of repossession if you default.
- High interest rates. Personal loans tend to have higher interest rates than auto loans, making them more expensive.
- More expensive and hard to get with bad credit. Personal loans come with stricter requirements than auto loans. And if you do qualify, expect rates up to 36% — much higher than even the rates for bad credit car loans.
If you’re leaning toward a personal loan because you’re worried about auto repossession, choose a cheaper car that fits your budget instead. Defaulting on a personal loan will damage your credit and make it harder to get car loans (and other things, like housing and even employment) in the future.
When could buying a car with a personal loan make sense?
Buying from a private seller
If you’ve got your eye on a car listed by a private seller but don’t have the money to pay for it now, a personal loan could be your best bet.
Some auto lenders do offer private party car loans, but they’re harder to find, usually come with higher rates, and may limit the mileage and loan amount. Personal loans don’t come with these restrictions.
Before you borrow, though, use a personal loan calculator to make sure you can afford your monthly payments. Missing monthly loan payments can lead to wage garnishment, lawsuits and a damaged credit score.
Buying a nontraditional car
Traditional auto loans are geared toward new vehicles or used vehicles less than 10 years old. Although some lenders offer classic car financing or exotic car financing, you may find that a personal loan ends up being a better deal.
When you don’t want to make a down payment
Unless you have excellent credit or the dealership is running a zero-down promotion, you’ll likely need to make a down payment when you buy a car with an auto loan. If you use a personal loan, however, you can drive off the lot with no money down.
Down payments make you less likely to become “upside down on your loan,” meaning you owe more than the car is worth. If you’re using a personal loan to buy a car, you can still make a down payment by putting down cash from your own savings and borrowing less money from the lender.
Step-by-step guide: How to use a personal loan to buy a car
1. Shop for a car
Before applying for a personal loan, you’ll need to know how much to borrow. Decide what kind of car you want to buy in order to nail down the exact amount.
It can take a few days to get your personal loan money, so it’s smart to contact the seller ahead of time to let them know you plan to buy the car, especially if you’re buying a used car.
2. Compare lenders and apply
You can save an average of $1,659 by shopping around for a personal loan with LendingTree. Take two minutes to tell us who you are and how much money you need. We’ll send you offers from up to five trusted lenders so you can compare them side by side to get the best deal.
3. Use loan money to purchase the car
Once approved, you’ll receive your loan as a lump sum, usually by direct deposit. You can use this money to buy your car.
It’s smart to use any leftover money to pay for title transfers, registration or insurance. You can also save money on interest by using the extra cash toward paying off the loan.
4. Start repayment
Your first loan payment will be due about 30 days after you get your money. Be sure to pay on time every time to avoid late fees and dings to your credit. You may even want to sign up for autopay for peace of mind (and a possible APR discount, depending on your lender).
Get personal loan offers from up to 5 lenders in minutes
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