Unless you can pay cash, you’ll likely need to finance a vehicle 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. However, it may cost more — though the benefits of an unsecured loan could outweigh the potential cost.

Key takeaways

  • Personal loans have very few restrictions on how funds can be used.
  • Rates are often higher and loan amounts are lower compared to traditional auto loans.
  • You may be able to avoid repossession if you default on a personal loan.

Can you use a personal loan to buy a car?

There are generally no restrictions on how you can use an unsecured personal loan. But while you can use a personal loan to buy a car, in most cases, it will cost you more than if you took out an auto loan. The interest rates on personal loans tend to be higher than auto loans, and it may be more difficult to qualify for the amount you need to finance a car. 

That being said, 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 overall cost.

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. They use your car as collateral, so if you’re unable to repay, 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. And they are generally unsecured, so if you use one to fund your vehicle, you’re not required to use your newly acquired vehicle as collateral.

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.
  • Unsecured loan that does not require collateral.
  • Can be used however you see fit.
  • Higher interest rates and shorter loan terms.

Typically, factors like your credit score and down payment factor into whether you’re approved — whether it’s an auto loan or a personal loan. However, because unsecured loans pose a higher risk of default for lenders, you may see higher interest rates and shorter repayment terms for a personal loan.

Pros of financing a car with a personal loan 

A personal loan may be the best option for financing your vehicle purchase if you need quick funding.

  • Fast access to cash: You can receive the money within a few days.  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. 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, especially if you are able to qualify for low rates on an auto loan from a bank or top online lender.

  • 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: Auto loans are meant for vehicle purchases, which means you may qualify for a higher loan amount to accommodate the cost of the car.

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 if you are buying an older vehicle, have poor credit or are able to score a competitive rate on a personal loan. 

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. In this case, it can be easier to find a personal loan that covers the cost and doesn’t have any age or mileage restrictions. 

It may also be useful if you’re purchasing a project car to fix up or if it has a salvage title. Personal loans can be used to purchase a vehicle in any condition, and a personal loan lender doesn’t have a vested interest in your purchase. 

You have poor credit

A lower credit score isn’t necessarily a deal breaker when applying for auto financing, but you may only qualify for a high rate if you are approved for an auto loan.  

The same may be true for personal loans, however. And it could be difficult to qualify for a bad credit personal loan without securing it, so for some, it may mean using the vehicle as collateral anyway.

You qualify for low personal loan rates

If you have good or excellent credit, you may find that the personal loan rates are lower than what you’d get with an auto loan. 

But if you are able to qualify for a low interest personal loan, you may be able to qualify for special auto loan deals as well. In some cases, this could mean a significant rebate or even zero percent financing on your auto loan.   

The bottom line

Consider what kind of vehicle you’re interested in, your credit score and your budget when choosing between a traditional auto loan and a personal loan.  

Regardless of which type of loan you choose, compare offers across multiple lenders. You can also use a personal loan calculator and an auto loan calculator to compare costs. 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.