Would you like to buy a car in the near future? Unless you have the full amount in cash, you will probably need to finance the vehicle purchase with an auto loan. But there is another option available to you if an auto loan isn’t ideal: getting a personal loan to buy a car.
You have many options when it comes to financing your next vehicle. You can take out an auto loan, finance through the dealership, or get a personal loan. Each option has its own benefits and drawbacks that you should consider before making your decision. In general, you might be better off taking out an auto loan for your next vehicle purchase.
Using a personal loan to buy a car
You can use an unsecured personal loan for almost anything. Whether you’re wanting to buy a car or consolidate debt, a personal loan is a great option. However, it’s important to note that in most cases, an auto loan will have lower interest rates than a personal loan.
Auto loans may be more difficult to obtain than traditional loans, but they offer many benefits. Your car will not be repossessed should you fall behind on monthly payments, and funding is often quicker. However, the terms of an auto loan may not be as favorable as with other types of loans, so monthly payments could be higher.
Auto loan vs. personal loan: key differences
With a personal loan to buy a car, you borrow money from a lender and agree to repay the debt over time, plus interest. The loan is used specifically to buy a vehicle. You make payments on the loan until it is paid off.
When it comes to getting an auto loan, your credit score and down payment are usually the two most important factors. With a secured loan like this, your car acts as collateral. So, if you miss any installment payments, the lender has the right to repossess your car. In exchange for the security of the loan, borrowers often get lower interest rates and longer repayment terms. This can help make monthly payments more manageable.
There are many different types of loans that people can take out for various purposes. One type of loan is a personal loan, which can be used for things like consolidating debt or paying for unexpected expenses. Unlike a car loan, you don’t have to put up collateral when taking out a personal loan to buy a car.
Although unsecured loans may have higher interest rates and shorter repayment periods, they also pose a higher risk of default for lenders. As such, it is important to carefully consider all pros and cons before taking out this type of loan.
Many people use a personal loan to buy a car. However, personal loans can also be useful for buying project cars. For example, you may want to purchase a non-operational car from a private seller and use the loan funds to rebuild it. Getting an auto loan for this type of project car can be challenging, but a personal loan can be a good option.
| Auto loan | Personal loan |
|---|---|
| A secured loan that uses your car as collateral | An unsecured loan that does not require collateral |
| Can only be used for vehicle financing | Can be used however you see fit |
| Lower interest rates and extended loan terms | Higher interest rates and shorter loan term |
| More ideal for car purchases | More ideal for vehicle restoration projects |
Pros of financing a car with a personal loan
There are many benefits to taking out a personal loan to buy a car. Some of the advantages include:
- Fast access to cash: With just a few clicks, the money can be yours within days – no need to find the car first. This is ideal when using a loan to buy from a private seller.
- No collateral: Many people are unaware that there are different types of personal loans available. Some loans are secured, which means they are backed by collateral like a car or home. Others, however, are unsecured personal loans that don’t require any collateral.
- Use funds however you choose: There are many reasons to take out a loan and just as many ways to use the money you receive. With a car loan, the funds must be used to purchase a vehicle. But with a personal loan, you can use the money however you see fit.
Cons of financing a car with a personal loan
Before taking out a personal loan to buy a car, it’s important to consider all your options and make sure it’s the best decision for you. There are a few things to keep in mind when making this decision:
- 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 is it a good idea to use a personal loan to buy 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
Before taking out a personal loan to buy a car, it is important to weigh your options and consider your circumstances. Your credit score, budget, and ideal repayment timeline are all factors that should be taken into account. Ultimately, the decision of whether or not to finance a car purchase depends on your unique situation.
No matter which loan you get for your car, it’s a good idea to compare offers from multiple lenders. You can use calculators to figure out how much your loan will cost. The best loan for you will have a low rate and good terms so that paying for your new car is as easy as possible.
