Can you use a personal loan to buy a car?

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Buying a car is a big financial decision. If you’ve decided on your next vehicle but need help funding the purchase, getting a loan to buy a car is a common solution.

An auto loan is a conventional way to buy a car, but can you use a personal loan to buy a car as well? The short answer is yes, but there are a few caveats you should know before taking out a personal loan for your vehicle purchase.

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’re agreeing to repay the lender over an agreed-upon timeline for the principal loan balance you’ve 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 interest rates and longer repayment terms, which can help make monthly payments more manageable.

Personal loans are also installment loans that you pay over time. However, 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, since 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.

Things to consider when choosing an auto loan vs. a personal loan

Taking out a loan is a big step, requiring potentially years of regular payments. Before taking out a personal loan or an auto loan, make sure to consider the factors that will determine your eligibility, rate and more.

Credit score/history

Your credit score is one of the main factors that lenders use when calculating your rate — the higher your credit score, the lower your APR. Many lenders also have minimum credit score requirements, especially for unsecured loans. Car buyers with bad credit may have a better chance of getting approved for an auto loan than a personal loan, since an auto loan is secured with collateral.

Type of car you want to buy

Since auto loan lenders use your car as collateral, there are more restrictions when it comes to the type of car you can purchase using the loan. If you default, lenders want to know that the vehicle has value.

Personal loans, however, can be used at your discretion, so there are no restrictions about the age of your vehicle or its condition. For example, if you want to purchase a fixer-upper or older model, you may be better off with a personal loan.

Loan term

Auto loans are specifically designed for the purpose of buying a car, so loan terms are longer than those of personal loans. For example, auto loan terms are generally between 36 months to 72 months. Personal loans, on the other hand, may require you to repay the loan in as little as one year. Although it’s best to choose the shortest term you can afford, longer terms will lower your monthly payments.

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. Since there’s no collateral for personal loan lenders to fall back on, they typically charge higher interest rates 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. Since 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.

Should you take out a personal loan to buy a car?

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.

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