Can I Use a Personal Loan to Buy a Car?

You can get a personal loan from a bank, an online lender, or a credit union, and you can use it to buy almost anything, including a car.

Though it’s more common to use an auto loan to buy a car, taking out a personal loan can make sense in some circumstances. For example, you may want to use a personal loan if you don’t want to make a down payment or are buying from a private seller. Look for a personal loan that has a low interest rate and a repayment schedule that works for you, and is with a lender that you trust. 

How to Use a Personal Loan to Buy a Car

A personal loan is typically an unsecured loan that you can use for a variety of purposes. You may use a personal loan to consolidate debt, pay for home renovations, or buy a car.

Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over time, typically with interest, and interest rates can vary depending on your lender and credit score. Some lenders may also charge fees.

An auto loan works in a similar way, but with some key differences. Auto loans are secured, which means they require some type of collateral. In this case, your collateral is your new car—if you fail to pay back the loan, your lender can repossess your car to recoup the cost of the loan. In addition, auto loans can only be used to buy a car, and most can only be used to buy a car less than 10 years old.

Pros and Cons of Using a Personal Loan to Buy a Car

Pros Explained

• Flexibility: Auto loans are generally only available if you’re buying a car from a dealership. If you want to buy a car from a private seller, you can use a personal loan to cover the cost.
• Fast access: You can generally receive the funding for a personal loan within a few days if you are approved for the loan.
• No collateral: Since personal loans are unsecured, your car is not at risk if you fail to pay back your loan. If you are worried about not being to repay the loan and are looking to avoid repossession, however, then taking out a personal loan is not a good idea. Failing to pay back a personal loan can also have serious financial consequences.

Cons Explained

• Higher interest rates: Because personal loans are unsecured, they are a greater risk for your lender. This risk is mitigated by higher interest rates for personal loans compared to auto loans.
• Shorter terms: It’s common for auto loans to have terms of five years or more, whereas personal loans generally have shorter terms. This means your monthly repayments will likely be higher.
• Limited availability for borrowers with bad credit: Because auto loans are secured, they are less risky, so lenders can offer them to borrowers with bad credit. To get a personal loan with a reasonable interest rate, you’ll generally need a credit score of 670 or above, although credit requirements vary by lender.

Personal Loan vs. Auto Loans

For most borrowers looking to finance a vehicle purchase, an auto loan will be the better option. Auto loans generally have lower interest rates than personal loans, longer repayment periods, and lower monthly repayments.

How to Use a Personal Loan for a Car

Using a personal loan for a car is a fairly straightforward process that begins with shopping for a car and a lender. Here is a step-by-step summary of how to use a personal loan to buy a car.

Step 1: Shop for a New Car

To apply for a loan, you’ll first need to know how much you need to borrow, so consider which car you want to buy before applying for the loan. That way, you know the price of the car and how much to apply to borrow.

Step 2: Compare Lenders

Next, shop around for the best loan deal. You should look for the loan with the lowest annual percentage rate (APR), and with monthly repayments that you can easily afford. Your interest rate and other terms will be determined by your credit score, so it’s a good idea to check your credit score before applying for a loan. You can often get pre-qualified with a soft credit check, which can help you compare which loans you are eligible for.

Step 3: Apply

You can apply for a personal loan with a bank, an online lender, or a credit union. Most lenders will allow you to apply online, though credit unions will require you to become a member first.

The application process will entail providing your financial information and personal information such as your Social Security number and address. This information will help the financial institution run a credit check and assess your risk as a borrower.

Step 4: Use Loan to Purchase a Car

If the lender approves your application, you should receive your money in your bank account within a few days. You can then use this money to buy your new car through whatever forms of payments the dealer accepts, such as a cashier’s check, a personal check, or a credit card payment.

Step 5: Make Payments

After you’ve taken out your personal loan, you’ll need to make monthly repayments on it according to the terms of the agreement. If you fail to make the payments on time, your lender will likely charge you late fees. In addition, missed payments can damage your credit score, which will impact your ability to qualify for future loans.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

When Could Using a Personal Loan for a Car Make Sense?

An auto loan is generally the best option to finance a car purchase because it offers the lowest rates, as it uses the car as collateral. However, in some circumstances, a personal loan might make more sense. These include situations such as if you are buying from a private seller or have a low credit score.

Buying from a Private Seller

Auto loans are available at financial institutions and dealerships. You can use an auto loan from a bank or credit union to buy a loan from a private seller, but not all financial institutions offer private-party auto loans. So, if you are buying a vehicle from a private seller, then a personal loan might be a good option.

Having a Low Credit Score

If you have a low credit score, you might not be able to get an auto loan. You will likely have a more difficult time getting a personal loan as well. However, some lenders specialize in personal loans for people with bad credit.

The downside to getting a personal loan with a low credit score is that you will face higher interest rates, which can make the loan very expensive.

If you can, consider delaying your car purchase and work on improving your credit score by paying down debt and making timely payments before you apply for either a car loan or a personal loan.

The Bottom Line

You can use a personal loan to buy a car, but this typically only makes sense in specific circumstances. Auto loans tend to have lower interest rates than personal loans, and longer repayment periods. However, if you are buying a car from a private seller, then a personal loan might be a good option.