Need to finance a new or used car? Find out if a personal loan is worth it.
There are a few financing options you have to choose from if you want to buy a car. You might already have an idea which car loan would be best for you, but you may also want to consider a secured or unsecured personal loan.
Personal loans can give you different benefits to a car loan. Find out what they are in this guide.
Personal loans vs car loans
|Personal Loan||Car Loan|
|Cars you can finance||Any vehicle||New and used up to a certain age|
How does a personal loan work to finance a car?
Personal loans work in a very similar way to car loans, but have a few notable differences. You can request a loan for much more than the value of the car with a personal loan lender — car loans generally don’t allow this. You also don’t need to supply the vehicle details to the lender, just what you plan to do with the funds.
Once you’ve received the personal loan amount you can use it for the car and however else you see fit. Loan terms can range between one and seven years, and you can generally borrow between $1,000 and $50,000.
Compare your financing options
What are the benefits of using a personal loan?
While a car loan may be better suited in certain situations, personal loans offer a range of benefits to those looking to finance a vehicle:
- Flexibility with approved funds. A personal loan is not tied to how much the car purchase is. Meaning, you’ll be able to borrow additional funds for insurance, modifications or even to consolidate other debt.
- Buy a used car. While some car loan lenders only allow you to purchase a used vehicle under a certain age, you can finance any car you want with a personal loan. This includes classic vehicles and used cars over the age limit.
- Range 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 a car loan.
Buying situations and financing options to consider
Not sure what type of finances best for you? Consider the following situations:
- Buying a new car from a dealership. It may be better to use a car loan or dealership finance, unless you need more than the cost of the car. You’ll be able to get a competitive rate and may have access to more convenient features with dealership financing.
- Buying a used car from a private seller. Depending on the age of the vehicle, you may be able to choose between a personal loan or a car loan. A personal loan may lend more flexibility in this situation if it’s an older car.
How much does a personal loan cost?
Personal loans come with a variety of fees and charges that should be considered before you apply:
- Interest rate. This rate can either be fixed or variable and can range from 5% to 36% depending on the type of loan you apply for and your creditworthiness.
- Origination fees. You may need to pay a fee to set the loan up — this is typically 1-3% of the loan amount.
- Ongoing fees. Some personal loans may come with annual fees that will increase your ongoing repayments. Make sure to consider these when comparing your options.
- 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. Make sure you get in touch with your lender if you think you’ll be late with a repayment to avoid these.
What are the drawbacks of 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.
How to decide what’s right for you
First, make sure the lender offers loan amounts that cover your car purchase. Then, consider the features that are available with each loan such as early payoff and refinancing, do these suit your needs? After this compare the costs of the most suitable loan options and select the most affordable on your budget.
Bottom line: Finding the right financing option comes down to costs, features and flexibility.