Required

Can You Use a Personal Loan to Buy a Car?

Edited by:
Kristin Marino verified

Shopping for a car is challenging.

Not only do you need to consider the car itself — such as which type or whether you will buy new or used, but there are also considerations for how to pay for it.

Unless you have sufficient cash on hand from savings to purchase the car outright, you’ll need to finance it.

But should you use a traditional auto loan or does it make more sense to get a personal loan instead?

Auto loans are a good choice for buying a car in many cases, and often the best choice.

There are some instances, however, when you might need a car but find yourself in a situation where an auto loan may not work for you.

In that case, a personal loan can be used to buy a car.

What Is the Difference Between a Car Loan and a Personal Loan?

Auto loans and personal loans have some similarities but also distinct differences.

Both are installment loans that allow you to borrow money for a lump sum purchase that you can then repay with monthly payments over several years.

How does a personal loan work?

A personal loan provides you with a lump sum of money that you can use to pay for just about anything, including purchasing a car.

Although it’s generally best to save up for most large expenses, it isn’t always possible, and personal loans can provide you with financial flexibility.

Common reasons people use personal loans include:

The personal loan approval process is often automated and works very quickly.

If there’s nothing out of the ordinary and all of your application documents are in order, you can often get a loan decision in a matter of minutes, if not instantly.

Once your loan is approved funding is also usually very quick.

You may see the money show up in your account within a few days.

One benefit of personal loans over other types of debt is that the interest rate is usually fixed, as are your payments.

Your credit card on the other hand likely has an adjustable rate which makes planning a little more complicated.

The actual interest rate you get on your personal loan is largely driven by the interest rate environment at the time you take out the loan and your own credit score.

The higher your credit score, the lower interest rate you’ll get.

The amount you can borrow and the loan terms vary depending on the lender.

Most lenders offer loans for as little as a few thousand dollars and up to $50,000, but some will even make personal loans of up to $100,000.

The most common terms are from one to seven years.

How does a car loan work?

Car loans are similar to personal loans, except that they are intended specifically for the purchase of a vehicle, and that vehicle serves as collateral for the loan.

You apply for a car loan in much the same way that you apply for a personal loan, with the exception that you’ll need to provide information about the vehicle you intend to purchase.

Rather than sending the funds to your bank account, the lender is likely to make payment directly to the seller of the car. In many cases, the dealership has a separate business line to provide financing.

That means the financing and purchase transaction can all be completed together by the same person.

In addition to your credit score and history, your lender will also consider the type of car and your down payment when determining the interest rate to offer you.

Terms also vary between lenders but auto loans are generally available with repayment periods of one to eight years for new cars, and require a 20% down payment, although some may require less.

How are they different?

The most significant difference between a personal loan and an auto loan is that the auto loan is always secured by the vehicle that you use the loan to purchase.

That means that if you fall behind on your payments and default on your loan then the institution that issued the loan can repossess your vehicle.

Personal loans, on the other hand, are not always secured.

In fact, personal loans are usually unsecured. When a personal loan is secured, it is often not with the vehicle but with other assets that you own.

Unsecured personal loans pose more risk to the lender because they do not have collateral.

This means that the interest rate you are charged on an unsecured personal loan will generally be higher than the rate on a comparable auto loan.

Personal Loans vs. Auto Loans

Compare rates and find the best personal loan.

Why Choose a Personal Loan Over a Car Loan

If auto loans are specifically intended for buying vehicles and often have lower interest rates why would you ever consider buying a car with a personal loan?

There are some instances where it could make sense.

Down payment

Auto loans sometimes require a down payment.

If you don’t have the money for a down payment or would rather use the money for something else then a personal loan is a way to get around it.

Flexibility

With an auto loan, you have to select the car you wish to purchase before you take out the loan.

Even if you get a pre-approval it will often stipulate the type of car and still doesn’t guarantee you’ll actually be approved for the loan.

With a personal loan, you’ll be able to receive funding before you even begin shopping if you choose to.

This provides you with significant flexibility in regard to what you purchase.

Private seller

Auto loans are often obtained from the same dealership where the car is purchased.

If you purchase a used vehicle from a private seller such as your neighbor, they won’t have this capability.

It may be easier to get a personal loan and then use the proceeds to write a check for payment.

Vehicle condition

Sometimes the vehicle you want to purchase can steer you in the direction of a personal loan.

For example, maybe you want to buy a used fixer-upper.

Often, you won’t be able to qualify for an auto loan if the car isn’t in good working condition.

Because a personal loan doesn’t require the vehicle as collateral that doesn’t matter.

Low purchase price

A personal loan may also be more convenient if the car is older and cheaper than what a financial institution will grant an auto loan for.

Pros and Cons of Using a Personal Loan for a Car

As with all financial decisions, there are pros and cons associated with the decision to use a personal loan to purchase a car.

FAQs

Is it better to use a personal loan or auto loan for a car purchase?

When it is available, an auto loan is often the best option due to its lower interest rates. However, the best choice depends on your situation and preferences.

Is it harder to get a personal loan or an auto loan?

Auto loans are usually easier to obtain because you must pledge the vehicle as collateral, making them less risky from the lender’s perspective.

Can I use a personal loan for the down payment on a car?

While there’s not likely to be anything stopping you from doing this from the personal loan lender’s perspective, you may need to disclose the source of your down payment to the auto loan lender. Borrowing your down payment may disqualify you from the car loan.

Get matched to your perfect loan and level up your money game.
Find My Loan
Popular Posts

Related Content

Ready to up your money game?

See my loan options
Why AmONE is Trusted By Millions for Their Loan Needs

Anyone can put together a group of lenders in a marketplace to offer people loans. We go beyond that. We not only partner with some of the best lenders around (like Citi, Rocket Loans, SoFi and so many more), we also work with partners who can help people like you go beyond a one-time loan. We connect you with the money programs you need to help you get real financial solutions in place that allow you to tackle your debt and money problems so you can move forward. Getting out from under debt to financial freedom is daunting and we're ready to help you every step of the way.

AI is the hottest thing around right now, but we know from our decades of experience in the personal finance space that the last thing someone wants to do is talk to a robot when they need real answers. Solving money problems can be stressful and daunting, so don't settle for generic responses and information that offers little real financial insights. Speak to one of our many support specialists who all work from an AmONE office right here in the U.S. and get the answers you really need to make better financial decisions.

We work hard to find loan offers for even the most challenging financial situations. With our large lender marketplace, we know we give everyone the best shot at getting the loan, debt and credit help they're hoping to find. Even when someone's credit is clearly poor or they hold a large amount of debt, we still get our customers in front of lenders to give them the best shot at securing the funds they need. When the unexpected happens and customers are rejected for loans, we still work with them to find other financial solutions that put them on the path to financial recovery so they can keep moving forward toward their money goals.

Anyone can put together a group of lenders in a marketplace to offer people loans. We go beyond that. We not only partner with some of the best lenders around (like Citi, Rocket Loans, SoFi and so many more), we also work with partners who can help people like you go beyond a one-time loan. We connect you with the money programs you need to help you get real financial solutions in place that allow you to tackle your debt and money problems so you can move forward. Getting out from under debt to financial freedom is daunting and we're ready to help you every step of the way.

handicon
Matched with Lenders Who Fit Your Needs

Tell us your situation and we will match you instantly to financial solutions that are right for you.

shieldicon
Get Offers from Only Highly Rated Providers

We work with only the highest-rated partners that provide the best chance to get you the loan you need for your situation.

supporticon
Easy Access to Live Support Based in the U.S.

Get live support when you need it most, through email or phone, and have your questions answered fast.