Need to finance a new or used car? Find out if a personal loan is worth it.
Personal loans can give you different benefits to a car loan. Find out what they are in this guide.
You could borrow up to $40,000 for a variety of purposes, with rates starting from 6.95%.
- Recommended Credit Score: 640 or higher
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: 40000
- Loan Term: 3 or 5 years
- Turnaround Time: 1-3 business days
- Simple online application process
- No prepayment penalties
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 12–84 months||Typically 36–84 months|
How do personal loans work with buying 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.
- Wider 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.
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 using a personal loan.
- You want to buy an older car. Vintage collectors or 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.
- You can qualify for a lower interest rate on a personal loan. Though personal loans typically come with higher rates because they’re unsecured, there are some situations where you might actually get a better deal on a personal loan than a car loan. That’s because car loan providers and personal loan providers consider different factors when they look at applicants.
Buying from a dealership? A car loan could be a better deal
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.
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.
Where can I get a personal loan to buy a car?
Most lenders offer personal loans that you can use for any legitimate purpose — including buying a car. When searching for a personal loan to buy a car, you might want to look at the following types of lenders.
- Online lenders. Need those funds in a hurry? Can’t be bothered with a long application? Online lenders are known for their speed and ease. It typically only takes a few minutes to fill out an application and you can sometimes have funds deposited into your account within one 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 similar 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.
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.
Is a personal loan right for me?
To help yourself decide if a personal loan makes sense for your car purchase, ask yourself the following questions.
- Is my personal loan enough to cover the costs? It can be difficult to qualify for a personal loan over $50,000 unless you have excellent credit. Make sure you can borrow as much as you need with a personal loan before you decide to take one out.
- Is a car loan even 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, personal loans are 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.
- Is it important that I own the car right away? 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.
Finding the right financing option comes down to costs, features and flexibility. Car loans can be great for borrowers that want to buy from the dealership in a streamlined process or have mediocre credit. 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.