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

Can you use a personal loan to buy a car?

Technically, there are generally no restrictions in how you use unsecured personal loan funds. You can use a personal loan to buy a car, though in most cases, you might be better off taking out an auto loan for your next vehicle.

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. Auto loans use the vehicle that’s purchased as collateral if you default on the loan. This means that auto loan lenders will consider the vehicle you’re purchasing and its value, compared to your desired loan amount. This minimizes the lender’s risk of a financial loss if it needs to repossess your car to pay off the loan.

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. 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, 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.

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.

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.

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