13 Dec Should You Use a Personal Loan to Buy a Car?
A vehicle loan is a common way to buy a car, but can you buy a car with a personal loan as well? Taking out a personal loan to purchase a vehicle is feasible, but some things to consider.
Read More: The best auto loan companies for veterans.
Can You Use a Personal Loan to Buy a Car?
In theory, there are no constraints on how you spend the funds from an unsecured personal loan. While you can buy a car using a personal loan, taking out an auto loan is usually more feasible.
If you’re buying a project car to fix up, a personal loan could be beneficial. For instance, you might desire to restore a non-running 1960s muscle car with a salvage title purchased from a private seller. A personal loan can accommodate this kind of situation, and the lender has no inherent interest in your purchase.
For this particular project car, obtaining an auto loan may prove difficult. In the event of default on an auto loan, the vehicle you bought serves as collateral. The car you’re buying, and its value will be considered by auto lenders when determining the loan amount. If the lender needs to repossess your car to pay off the debt, this reduces the lender’s risk of financial loss.
Check out our article about helping disabled veterans get a car loan!
Personal Loan vs. Car Loan
Auto loans are installment loans used to buy a vehicle such as a car or a motorcycle. The principal loan amount plus interest must be repaid to the lender over a set period when you get a car loan.
Generally, your credit score and down payment determine whether you’re approved for an auto loan. Lenders may repossess your vehicle if you fail to repay your loan. Auto loan customers may benefit from reduced auto loan rates and longer payback terms in exchange for the secured loan, which can help make monthly payments more affordable.
Personal loans require installment payments as well. An individual may use a personal loan to pay for unexpected expenses or consolidate debts, in contrast to a car loan. Usually, personal loans are unsecured, so you aren’t required to use your recently acquired vehicle as security if you utilize one to support your vehicle purchase.
Due to the greater risk of default posed by unsecured loans for lenders, you might see higher interest rates and shorter repayment terms on these loans.
Personal Loan vs. Auto Loan: Key Differences
|Personal Loan||Auto Loan|
|Loan purpose||Versatile||Buying a car, however, some loans restrict you to buying newer models|
|APRs||Usually higher||Typically lower (introductory or promotional rates may be offered at 0%)|
|Credit score requirements||Due to the unsecured nature of the loan, the conditions are stricter||The terms are more lenient since the car is used as collateral for the loan (and could be repossessed if not paid back).|
|Cosigner option for applying||Yes, most of the time||In most cases, yes|
|Down payment||It is not necessary||It may be needed, particularly if you have bad credit.|
Benefits of Financing a Car With a Personal Loan
If your circumstances allow, a personal loan may be the best choice for financing your vehicle purchase. Some reasons to consider a personal loan include:
- Access to funds quickly: You can get the money in a matter of days and aren’t required to find the car you want first. It is helpful if you’re going to buy a car from a private seller with a loan.
- No collateral: While some personal loans are secured, the majority are not. You might be able to get an affordable unsecured personal loan without pledging your car as collateral if you have decent credit.
- Funds can be used however you want: Unlike auto loans, personal loans do not force you to use the money in a certain way. If you decide not to buy a car, you can repay the loan right away or use the funds toward another purchase.
Downsides of Financing a Car With a Personal Loan
Taking out a personal loan to buy a car isn’t always the preferable option. Consider the following before taking out a personal loan:
- Rates are higher: Unlike auto loan lenders, personal lenders do not have collateral to fall back on, so they usually charge higher interest rates.
- A shorter repayment period: Depending on the terms of your loan, you may have to repay the entire loan plus interest within a short period.
- The loan amount is low: Because auto loans cover car purchases, you may be able to get a larger loan amount if you have a low credit score. In contrast, personal loans have a lending limit that may or may not cover the total cost of a car.
How to Get a Personal Loan for a Car
The procedures for obtaining personal and auto loans are the same, and they include the following steps:
- Examine your credit score. Verify your credit score and credit reports before applying. Annualcreditreport.com Is a site where you may review your credit report.
- Compare different lenders. Compare rates, terms, and loan features before applying for a personal loan. Calculate your monthly payments on a personal loan to see how much you can afford.
- Pre-qualify or pre-approve yourself. Pre-qualifying for a personal loan allows you to check what rate and loan amount a lender is willing to offer you without negatively influencing your credit score.
- Bring your offer to a close. Before accepting a personal loan request, read the document carefully to ensure you understand the terms.
Personal Loan Terms
Repayment terms for personal loans are expressed in months — 12, 24, 36, etc. Having a longer loan term will reduce your monthly payments, but you will pay more interest over the life of the loan. On the other hand, shorter loan terms indicate larger monthly payments but lower overall interest because the principal is paid off sooner.
Personal Loan Calculator
Personal loans can be helpful if you need to pay off credit card debt or pay off significant debts. However, you cannot afford to take a personal loan lightly. Consider calculating how much money you will require using a personal loan calculator before applying.
- Calculate the length of time it will take for you to recoup your investment in years or months.
- Calculate your loan’s optimal interest rate.
- Calculate how much principal and interest you’d have to pay.
After you determine how much you need to borrow and how much you can afford to repay each month, you can begin looking for personal loans. Compare the finest personal loan offers once you’ve priced out different scenarios with the personal loan calculator.
Where to Get a Personal Loan
The following are the four main ways of getting a personal loan:
- Banks: Traditional banks and credit unions have different credit and income requirements. Obtaining a fair rate on a personal loan from a bank may be difficult if you have bad credit. If you need money quickly, banks may take longer to complete your application and provide funds, so find out how long the approval and funding procedure will take before you apply.
- Credit Unions: Credit unions, being a not-for-profit institution, reinvest revenues back into the organization, allowing members to take advantage of lower-interest loans. Typically, there are no costs or fees that are lower than those charged by a bank.
- Online Lenders: While many internet lenders offer personal loans, they cannot provide the same level of customized attention as a credit union or a local bank. There’s a chance they’ll have higher interest rates as well. Compare rates and make sure you understand the loan’s terms.
- Peer-to-peer (P2P) marketplaces: Online P2P marketplaces connect investors looking for debt financing with borrowers. Funding is usually swift, and rates are often competitive.
Deciding What’s Best for You
When purchasing a car, an auto loan is generally preferable to a personal loan for several reasons:
- Qualifying for an auto loan is less complicated.
- You will likely see a reduction in your interest rate.
- Other loan costs are less likely to be required.
To put it another way, getting a car loan is typically more accessible and less expensive than getting a personal loan. Even so, before you set foot on a lot, do some research.
Costs, features, and flexibility all play a role in selecting the best financing option. Borrowers who want to purchase a car from a dealership may benefit from car loans. Personal loans are ideal for people who want to go off the main path and buy an older automobile or from an unusual seller. The loans might be suitable for borrowers who have previously purchased a car and know what they will need to purchase along with it.
Whatever loan you choose, compare offers from various lenders when you are considering a car purchase.