Are you planning to buy a car soon? Unless you’re going to pay cash, you’ll likely need to finance the vehicle purchase using an auto loan. But there’s another option if an auto loan doesn’t quite work for you.

A personal loan can also be used to cover the cost of the vehicle. While both have benefits and drawbacks that you should weigh before deciding, you might be better off taking out an auto loan for your next vehicle.

Can you use a personal loan to buy a car?

There are generally no restrictions on how you use unsecured personal loan funds. You can use a personal loan to buy a car, though in most cases it will cost you more than if you took out an auto loan.

Personal loans are relatively easy to apply for and feature fast funding times. Plus, your car won’t be at risk of repossession if you fall behind on the monthly payments. Still, you may be offered unfavorable loan terms compared to what you’d get with an auto loan, leaving you with steep monthly payments and a higher cost overall.

Auto loan vs. personal loan: what’s the difference?

Auto loans are installment loans that are used specifically for the purchase of a vehicle, like a car or a motorcycle. When you take out an auto loan, you agree to repay the lender over an agreed-upon timeline for the principal loan balance you have borrowed, plus interest.

Typically, factors like your credit score and down payment factor into whether you’re approved for an auto loan. These loans use your car as collateral, so if you’re unable to make your installment payments, the lender may choose to repossess your car. In exchange for the secured loan, auto loan borrowers may see lower auto loan rates and longer repayment terms, which can help make monthly payments more manageable.

Personal loans are also installment loans you pay over time. Unlike car loans, personal loan funds can be used for many different needs, including debt consolidation and emergency expenses. Personal loans are generally unsecured, so if you use one to fund your vehicle purchase, you’re not required to use your newly acquired vehicle as collateral.

However, because unsecured loans pose a higher risk of default for lenders, you may see higher interest rates and shorter repayment terms for this type of loan.

One way using a personal loan to buy a car might be useful is if you’re purchasing a project car to fix up. For example, you might want to rebuild a non-operational 1960s muscle car that has a salvage title from a private seller. Personal loan funds can be used to purchase a vehicle in this condition, and a personal loan lender doesn’t have a vested interest in your purchase. However, getting an auto loan for this project car might be challenging.

The chart below provides an overview of how the two loan products differ.

Auto loan Personal loan
  • Secured loan that uses your car as collateral
  • Can only be used for vehicle financing
  • Lower interest rates and extended loan terms
  • More ideal for car purchases
  • Unsecured loan that does not require collateral
  • Can be used however you see fit
  • Higher interest rates and shorter loan term
  • More ideal for vehicle restoration projects

Pros of financing a car with a personal loan 

Depending on your circumstances, a personal loan may be the best option for financing your vehicle purchase. Some of the benefits of using a personal loan include:

  • Fast access to cash: You can receive the money within a few days and aren’t required to find the vehicle you plan on buying first. This is helpful if you want to use a loan to buy a car from a private seller.
  • No collateral: Although some personal loans are secured, many aren’t. If you have good credit, you may be eligible for an affordable unsecured personal loan that doesn’t put your car on the line if you can’t make payments.
  • Use funds however you choose: Personal loans don’t require you to use the funds in a specific way, as auto loans do. If you change your mind about buying a car, you can repay the loan immediately or put the money toward a different purchase.

Cons of financing a car with a personal loan 

Getting a personal loan to buy a car isn’t the best option for everyone. Before taking out a personal loan, consider the following:

  • Higher interest rates: Because there’s no collateral for personal loan lenders to fall back on, they typically charge higher interest rates for personal loans than auto loan lenders.
  • Less time to repay: Depending on the personal loan terms you qualify for, you may have to repay the entire loan, plus interest, quickly.
  • Lower loan amount: Because auto loans are meant for vehicle purchases, you may qualify for a higher loan amount to accommodate the cost of the car. Personal loans, however, typically enforce a loan limit that may or may not cover your entire car purchase.

When might it make sense to use a personal loan for a car?  

A personal loan could be a sensible way to finance a car in these situations:  

  • The car doesn’t qualify for a traditional auto loan. Many lenders set age and mileage limitations, making it more challenging to get a loan if the car is more than 10 years old or the mileage exceeds 100,000. 
  • Your credit score is below the lender’s minimum threshold. A lower credit score isn’t necessarily a deal breaker when applying for financing, but you may only qualify for an exorbitant interest rate if you are approved for an auto loan.  
  • The personal loan comes with more competitive financing terms. If you have good or excellent credit, you may find that the rates you’re being offered for personal loans are lower than what you’d get with an auto loan.   

The bottom line

Whether you should take out a personal loan to buy a car depends on your specific circumstances. Consider what kind of vehicle you’re interested in, your credit score, your budget and your ideal repayment timeline.  

Regardless of which type of loan you choose for your car purchase, it’s smart to compare offers across multiple lenders. You can also use calculators to determine how much your loan will cost; try starting with Bankrate’s personal loan calculator and auto loan calculator. Ultimately, the best loan for you will offer you a low rate and good terms to make paying for your new car as easy as possible. 

Learn more: