Learn when and when not to consider this car loan alternative.
Personal loans vs. car loans
|Personal loan||Car loan|
|Cars you can finance||Any car||New and used cars under around 10 years old|
|Collateral||None with an unsecured personal loan||Your new car|
|Terms||Typically 12 to 84 months||Typically 36 to 84 months|
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How does using a personal loan to buy a car work?
Personal loans work in a very similar way to car loans, although they have a few notable differences:
How much you can borrow.
You can request a loan for much more than the value of the car with a personal loan lender, and you don’t need to supply the vehicle details to your lender, just what you plan to do with the funds.
How you spend the money.
Once you’ve received the personal loan amount you can use it for the car and however else you see fit. This can be especially useful if you need to pay for taxes and state title fees, or if you don’t have a large down payment saved up.
Who gets the money — and when.
With a personal loan, you get your funds before you purchase the vehicle. This means that you can use that money like cash — simply use the deposit in your bank account to finance your car purchase. Car loans sometimes go directly to the dealership.
You have the option of applying for a loan with or without collateral when you apply for a personal loan — though you won’t be able to back it with your car.
Personal loan terms can range between one and seven years, and you can generally borrow between $2,000 and $50,000.
What are the benefits of using a personal loan?
While a car loan may be better in certain situations, personal loans offer a range of benefits to those looking to finance a vehicle.
- Flexible use of funds. Personal loans allow you to borrow as much as you need for nearly any purpose, so you can use your loan funds to purchase a car, upgrade your insurance or install custom modifications.
- Buy a used car. While some car loan lenders only allow you to purchase a used vehicle under a certain age, you can finance nearly any car you want with a personal loan. This includes classic vehicles and used cars over 10 years old.
- Variety of lenders. You may find a larger range of lenders and loan options if you look for an unsecured personal loan from an online lender rather than keeping your search solely on car loans.
What are the drawbacks of using a personal loan?
Choosing a personal loan to finance a car has downsides as well. Here are some of the drawbacks to consider:
- Costs. Compared to a car loan, you will generally find personal loans have higher interest rates.
- No add-ons. Car loans offer car specific extras — extended warranties and service plans —that generally aren’t available with personal loans.
- Tougher requirements. You might have better luck qualifying for a car loan if you have mediocre credit — those are secured and more forgiving of a low credit score than unsecured personal loans.
3 situations where a personal loan makes more sense
Here are three situations where you might benefit more from a personal loan than a car loan.
- You’re buying from a private seller. Many car loans come with restrictions on where you can buy your car. If you’re interested in buying a car from a friend — or some guy you found on Craigslist — you might have an easier time getting a personal loan.
- You want to buy an older car. Vintage collectors and lovers of older vehicles can have a hard time finding car loans if the car is over a certain age or has too many miles on it. You might want to look into personal loans if you’re buying a fixer-upper or purchasing a customized classic.
- You can qualify for a lower interest rate. While most car loans may have a lower interest rate because they’re secured by your car, borrowers with less-than-perfect credit may find a better deal by opting for a personal loan instead.
Buying from a dealership? A car loan could be a better idea
It may be better to use a car loan or dealership financing when you’re thinking about buying from a manufacturer or car dealership You’ll be able to get a competitive rate and may have access to more convenient features with dealership financing.
How much does a personal loan cost?
While how much your loan costs depends on your unique circumstances, you’ll want to consider two main factors: Interest and fees:
- Interest rate. Interest can be either fixed or variable and can range from 5% to 36% depending on the type of loan you apply for and your credit.
- Origination fees. You may need to pay a fee to borrow your loan, typically 1 to 3% of the loan amount.
- Ongoing fees. Some personal loans may come with annual fees that will increase your ongoing repayments.
- Late payment and non-sufficient funds fees. If you make a loan repayment late or fail to make a repayment you will be charged additional fees. Get in touch with your lender if you think you’ll be late with a repayment.
Where can I get a personal loan to buy a car?
You can get a personal loan to buy a car from a variety of lenders. Here are some of our top suggestions:
- Online lenders. Online lenders are known for their speed and easy process. It typically only takes a few minutes to fill out an application, and you may be able to have funds deposited into your account by the next business day.
- Banks. You might want to also look into your bank’s personal loan offerings. They sometimes offer discounts or simplified applications to members. Banks also tend to offer relatively low interest rates, though you’ll typically need good or excellent credit to qualify.
- Credit unions. These nonprofit financial institutions work similarly to banks but typically offer lower rates and have less strict credit requirements. It can take a while to get your funds, however, and you’ll have to open a savings account to qualify.
- Peer-to-peer (P2P) marketplaces. Online P2P marketplaces like LendingClub and Prosper connect borrowers with investors interested in funding their loans. Funding is typically quick and you can often get competitive rates.
Is a personal loan right for me?
To help yourself decide if a personal loan makes sense for your car purchase, try answering some of these questions:
- Is my personal loan enough to cover the costs? In most cases, you won’t need to borrow a lot to purchase a car. But just in case, make sure you can borrow as much as you need with a personal loan before signing a loan contract.
- Is a car loan an option? If you’re buying a car over 10 years old or has more than 100,000 miles on it, you could have trouble qualifying for a car loan to buy that vehicle. In this case, a personal loan may be one of your only options.
- Can I get a better deal with a personal loan? Try prequalifying with a few personal and car loan providers — or at least reach out to ask what rates you can personally expect with each. This will show you which lending option can get you a better deal.
- Is it important that I own the car? With a car loan, you don’t get the car title until you’ve made your last repayment. With a personal loan, you’ll own your car right away.
- Does it fit my budget? Personal loans can sometimes come with shorter loan terms than car loans. While a short loan term means you’ll end up paying less in interest, they can also mean higher monthly repayments. Make sure you can afford the monthly repayments on a personal loan before applying.
Can I use a personal loan to cover the down payment on a car?
It’s possible to use a personal loan to cover the down payment on a new car. But it might not be the best idea, especially if you’re also getting a car loan.
That’s because you’ll end up paying interest on the full value of your car — which can get particularly expensive with a longer loan term. And if you’re applying for two separate loans, you might have trouble qualifying since each application involves a hard credit pull, which lowers your score.
If you need help with the down payment, consider only applying for a personal loan or a car loan company that offers at least 100% financing.
Finding the right financing option comes down to costs, features and flexibility. Car loans can be great for borrowers who want to buy from the dealership. Personal loans tend to work better for those who want to wander off the beaten path by getting an older car or buying from an unconventional seller. They could be best for borrowers who’ve bought a car a before and know what they’ll need to purchase on top of the car itself.