Key takeaways
- A personal loan can be a good idea to finance a used car if conventional financing isn’t available or if you can’t qualify for an auto loan.
- Rates can be higher and repayment terms shorter, compared to traditional auto loans.
- You may be able to avoid repossession of your vehicle if you default on a personal loan.
Unless you can pay cash, you are probably like most buyers and will need to finance a vehicle. However, an auto loan isn’t your only option. Personal loans can be used for almost any purpose, including buying a car, and it might make more sense than borrowing an auto loan. That said, there are a few drawbacks to be aware of before choosing this option.
When to use a personal loan for a used or new car
A personal loan may not be most buyers’ first thought, but using a personal loan to buy a car can be useful in certain scenarios.
Conventional financing is not available
If you are considering buying an older car, it may not always be possible to secure a conventional loan with competitive auto loan rates. Some lenders may refuse to finance a vehicle that is more than 10 years old. You may also find that lenders require vehicles to have less than 100,000 miles.
Your credit is too low for an auto loan
If you have less-than-ideal credit, getting a car loan may be difficult. Some lenders offer bad credit auto loans, which may result in a more competitive offer due to more flexible credit requirements.
It is worth noting, though, that rates on bad credit personal loans tend to be high. Borrowers with FICO scores between 630 and 689 receive average personal loan interest rates between 17.80 percent and 19.90 percent.
Before submitting a formal application, consider prequalifying for a loan with at least three lenders. This will allow you to compare real offers side-by-side and decide whether a personal loan is the best route, without impacting your credit.
Your other option would be a subprime lender
In some cases, you may only qualify for financing at a buy-here, pay-here lot, which can be extremely costly.
A second-chance auto loan, or subprime loan, is another option, but this type of loan is prone to high monthly payments. Additionally, borrowers who have a subprime credit score typically pay the highest interest rates. The average interest rate on a subprime car loan during the second quarter of 2024 was 18.86 percent for used cars and 13.18 percent for new cars, according to Experian.
Subprime lenders should only be considered if you have no other options available. Shopping for a personal loan may provide a better alternative.
You qualify for a competitive personal loan rate
Unsecured personal loan interest rates tend to be higher than auto loan rates, but if you have outstanding credit, you may qualify for a competitive interest offer. Some personal loans come with starting rates as low as 7.49 percent. That’s lower than the average super prime rate for a used car loan, which is 7.66 percent.
However, if you qualify for a low interest personal loan, you may also qualify for special auto loan deals as well. This could mean a significant rebate or even 0 percent financing on your auto loan. Explore both personal loans and manufacturer deals to determine the better option for your finances.
Personal loans vs. auto loans for buying a car
| Personal loan | Auto loan |
|---|---|
| Frequently unsecured | Secured by the vehicle |
| Can be used for multiple purposes | Restricted to vehicle financing |
| Higher interest rates and shorter loan terms | Lower interest rates and extended loan terms |
Auto loans and personal loans are similar in that they are both installment loans. That means you will make monthly payments over a set period. They both come with a fixed interest rate. Your income and credit history will be key to getting approved with either type, but there are also some key differences.
There are several reasons to use a personal loan, including medical expenses, wedding costs, debt consolidation and even buying a car. However, that versatility can come at a price.
Most personal loans are unsecured, meaning they do not require collateral. Because the loan is riskier for the lender, the interest on a personal loan tends to be higher than traditional auto loans. The repayment timeline may also be shorter — most lenders cap loan terms to five years.
An auto loan, on the other hand, is a secured loan specifically designed for buying a vehicle, which then serves as collateral. This means the car can be repossessed if the loan becomes delinquent or you default. Because of the lower risk, lenders tend to offer more favorable interest rates and terms on these loans. They also may offer loan terms of up to seven years, meaning a smaller monthly payment.
Advantages of using a personal loan to buy a car
Using a personal loan can be useful if you don’t want to provide a large down payment or need a fast approval process for a private sale.
- Quick access to cash. Some lenders offer next-day and even same-day funding. This can be useful if you want to use the loan to buy a car from a private seller since you may be able to act quicker.
- No down payment. Although a down payment isn’t always required to get an auto loan, it’s often encouraged to help you get a lower interest rate. By using a personal loan, you avoid having to put down 10 or 20 percent of the car’s purchase price.
- No collateral. Although some personal loans are secured, many aren’t. If you have good credit, you may be eligible for an affordable unsecured loan. You won’t put your car on the line if you can’t make payments, though the lender could still sue you if you default.
Disadvantages of using a personal loan to buy a car
Personal loans may be a convenient way to buy a car, but you may face higher rates and limited loan amounts compared to traditional auto loans.
- Higher interest rates. Because there’s no collateral to secure the loan, the average personal loan rate is higher than the average auto loan rate. Rates can be as high as 36 percent, although there are cases of bad credit auto loan rates being just as high — or higher, depending on your state.
- Higher monthly payment. Personal loans tend to have higher rates and shorter repayment terms. That means you could end up with a higher monthly payment than if you took out an auto loan.
- Limited amounts. Personal loan lenders tend to limit loan amounts and term lengths based on creditworthiness. If you have poor credit, you may not be able to get a loan high enough to cover the full cost of your desired vehicle.
Bottom line
When buying a used car, a personal loan can sometimes be more favorable than a traditional auto loan. This is especially true if you can’t qualify for traditional financing or if you want to own the title of your vehicle right away.
However, because these loans are often unsecured, they may come with higher interest rates and shorter repayment terms than many auto loans. Before deciding, consider using a loan calculator to crunch the numbers and determine which option makes the most sense financially.
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