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Unless you can pay cash, you are probably the same as most buyers and you will need to fund your vehicle purchase, but a car loan is not your only option. Personal loans can even be used for almost any purpose, and may make more sense than taking out a car loan. That said, there are some drawbacks to note before choosing this option.
4 Reasons to Get a Personal Loan to Buy a Car
There are certain scenarios where personal loans could be a good option to pay for your car. It is one of your only options or you can get a traditional car loan. Find out your finances, calculate the numbers and see if it makes sense to you.
Some examples of when it could be a better option include:
1. Traditional funding is not available
If you are considering purchasing an older car, you may not always be able to secure a traditional loan with a competitive car loan fee. Some lenders may refuse to fund a vehicle that is more than 10 years old. You will also find that lenders will need vehicles that are less than 100,000 miles for their vehicles.
2. Your credit is too low for a car loan
If you have less credit than ideal, some lenders will offer poor credit personal loans, but getting a car loan can be difficult. Before submitting your formal application, consider prequalifying for a loan with at least three lenders to compare fees without damaging your credit.
3.Other options are subprime lenders
Second Chance car loans, or subprime loans, are another option, but this type of loan is likely to result in high monthly payments. Additionally, borrowers with subprime credit scores usually pay the highest interest rate. According to Experian, the average interest rate for subprime car loans in the fourth quarter of 2024 was 19.38% for used cars and 13.08% for new cars. It can be more than what you pay on a personal loan.
4. Eligible for a competitive personal loan rate
Car loans usually have low rates, but good credit loans are as low as 6.5%. However, if your excellent credit and strong financial portfolio qualifies for a low-interest personal loan, you also qualify for a special auto loan transaction. This could mean a significant rebate or 0% financing on your car loan. Explore both personal loan and manufacturer transactions to determine which options are appropriate for your finances.
Buying a car using a personal loan: pros and cons
Like all financial products, personal loans have advantages and disadvantages. Before using your personal loan to buy a car, compare options and make sure the pros outweigh the cons.
Personal loans vs. car loans to buy cars
Car and personal loans are the same Installment loanthat is, they are usually paid for two to seven years on both types of loans over a set period of time, between two and seven years. Both have a fixed interest rate, so your income and credit history are key to approval. There are also some important differences.
Auto loans are used specifically to fund vehicles, but there are many other reasons to use personal loans, such as debt consolidation and housing improvement projects. Additionally, a car loan is a protected loan that uses your vehicle as collateral and lenders can recoup the loan if they defaulted on the loan, but personal loans do not. There’s nothing to support personal loans, so interest rates are often higher than car loan rates.
| Personal loan | Auto Loan |
|---|---|
| There is not frequent security | Protected by the vehicle |
| Can be used for multiple purposes | Limited to vehicle financing |
| Higher interest rates and shorter loan terms | Low interest rates and extended loan terms |
Conclusion
When purchasing a used car, personal loans may be more advantageous than traditional car loans. This is especially true if you are not eligible for traditional funding or if you want to own the vehicle title right away.
However, these loans are often unsecured, so they may come with higher interest rates and shorter repayment terms than many car loans. Before making a decision, consider using a loan calculator to calculate the numbers and determining which options make the most financially meaningful.
