Can You Use a Personal Loan To Buy a Car?

Yes, you can use a personal loan to buy a car. Auto loans, though, tend to be cheaper because the car is used as collateral.

On the other hand, personal loans may have higher rates and repayment terms could be shorter.

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Key Takeaways

• Yes, you can use a personal loan to buy a car — it may be the smarter move if you're buying from a private seller, financing an older or high-mileage vehicle or want to hold the title immediately.

• Auto loans typically offer lower interest rates because the vehicle serves as collateral, reducing the lender's risk — though a personal loan can still win out if you need flexibility or immediate title ownership.

• Personal loan funds are more flexible — you can borrow enough to cover the car's price plus sales tax, registration fees and other costs in a single payment.

• Your credit score affects your rate and approval odds — many lenders look for at least 660 for a personal loan, so check your credit report for errors before you apply.

• Start by getting prequalified with at least three sources — your bank, a credit union and an online lender — and compare rates, fees and repayment terms before you commit.

Summary generated by AI, verified by MoneyLion editors

Personal Loan vs. Auto Loan — What's the Difference?

While both allow you to receive funding upfront, these are the key differences between personal and auto loans:

• Auto loans require that you use the car as collateral, while personal loans may be unsecured.

• Auto loans typically have lower interest rates than personal loans.

• Both credit score and income are considered, but auto loan approvals also take the car's value into account.

When Does Using a Personal Loan To Buy a Car Make Sense?

Not everyone should use a personal loan for a car purchase, but in some situations, it might be your best option:

• You're buying from a private seller.

• You want a loan that's not tied to a car.

• You're buying a classic car.

• You'd like to be the title owner right away.

• You need funds to cover costs beyond the car's price.

Buying From a Private Seller

When you're buying a car from a private seller, traditional auto financing may not be available. Even if it is, the personal loan may have a lower interest rate. With money available in your account through a personal loan as quickly as the same business day, you can make sure you get the car you want.

You're Buying an Older, Classic or High-Mileage Car

Banks and other lenders rarely finance older, classic, or even high-mileage, late-model cars through a traditional auto loan. Some lenders offer classic car loans, but you may be able to secure a better rate with a personal loan. Often, if a car has more than 125,000 miles or is more than 10 years old, a bank won't finance it through a traditional car loan, according to SoFi.com.

You Want To Own the Title Immediately

When you take out an auto loan, you're putting your vehicle at risk. If you can't make the loan payments, your lender can repossess the vehicle. A personal loan allows you to own the title to the car immediately. There may be other reasons you want to own the title, too. For instance, if you purchase a vehicle at an auction and want to resell it for a profit, you'll want to own the title right away.

You Need To Cover More Than Just the Car's Price

If you're buying a car but also want some extra cash in your pocket to cover other expenses, a personal loan allows you to borrow all the money you need and pay it back with one monthly payment.

Apart from the convenience of a single payment, you won't have two hard credit inquiries or new loans showing in your credit profile in a short amount of time, which can help keep your credit score up.

When Shouldn't You Use a Personal Loan To Buy a Car?

Think about the advantages you get with a personal loan. Do they outweigh any negatives? Ask yourself the following:

• Are you getting a better interest rate with an auto loan instead?

• Do you need a longer repayment term than the personal loan would provide?

• Are you buying an expensive car?

• Is your personal loan payment manageable?

When Is an Auto Loan a Better Deal?

You might be one of the buyers who opt for a traditional auto loan. Here's why:

• You're buying a newer car from a dealership: Dealers make it easy to secure financing on the spot, called a "sign-and-drive" deal. These offers are typically available on newer cars.

• Your primary goal is to secure the lowest possible interest rate: You'll often find the lowest interest rate on an auto loan through the dealer if they have a promotional offer. You can also get low rates on auto loans from banks and credit unions.

How To Get a Personal Loan for a Car Purchase

If you've decided a personal loan is right for your car purchase, here's how to get one:

1. Check your credit score: Higher scores qualify for better rates. Before applying, review your credit report and address any errors.

2. Calculate your total loan cost: Add the car's price, plus sales tax, dealer fees, title transfer and registration fees. Deduct the down payment you are able to make. That's the total loan cost.

3. Compare lenders: Get quotes from at least three sources, including your local credit union, which often has the lowest rates, your bank and an online lender. Look for lenders that do a soft credit pull for prequalification. Make sure to compare any loan origination fees and prepayment penalties.

4. Get preapproved: Submit an application for preapproval to find out how much you can borrow and see your interest rates without impacting your credit score.

5. Receive funds and purchase the car: When you find the best lender with the lowest rate, submit your application for approval. Money will be deposited directly into your account, allowing you to pay the seller like a cash buyer.

Whatever option you choose, make sure the monthly payment fits comfortably in your budget. A good rule of thumb is to keep all your car expenses — including payment, insurance, gas and maintenance — which should be under 10 to 15% of your monthly income.

Choosing Your Car Loan: When a Personal Loan Makes Sense

If you choose a personal loan, you'll own the title to the vehicle immediately, and you may be able to avoid purchasing full collision coverage or gap insurance coverage — although you'll be taking the risk of losing your investment if your car is totaled in an accident. You'll still have to pay off the personal loan while securing funds to buy a new vehicle.

Get prequalified and check rates for both an auto loan and a personal loan, and compare your options before you make your choice.

FAQs About Using a Personal Loan To Buy a Car

Do personal loans have better interest rates than auto loans?

Since auto loans are secured loans, backed by your vehicle as collateral, they often have lower interest rates than personal loans.

What credit score do I need for a personal loan for a car?

Lenders often look for a credit score of at least 660. You may be able to secure a personal loan with a lower credit score, but your interest rate may be higher than you'd like.

Is it a good idea to pay off a car loan with a personal loan?

Paying off a car loan with a personal loan can be a good idea if you also want to take out additional funds and prefer a single loan payment, or if your car is too old or has too high mileage to refinance with an auto loan. If you want to obtain the title to your car right away, buying out your auto loan with a personal loan is one way to do it. In general, though, a personal loan comes with higher interest rates than a secured auto loan.

Key Terms

• Personal loan: An unsecured installment loan you can use for nearly any purpose, including buying a car; approval and interest rates are based on your creditworthiness rather than an asset.

• Auto loan: A secured loan used specifically to finance a vehicle purchase, where the car itself is the collateral; this typically results in lower interest rates than an unsecured personal loan.

• Collateral: An asset pledged to secure a loan. If you default, the lender can seize the asset — with an auto loan, that asset is your vehicle.

• Secured loan: A loan backed by collateral. Because the lender can recover losses by repossessing the asset, secured loans generally carry lower interest rates than unsecured loans.

• Unsecured loan: A loan that doesn't require collateral; the lender bases approval and rates on your credit score, income and financial history alone, which typically means higher rates.

• Lien: A legal claim a lender holds on a vehicle's title until the loan is fully repaid. With an auto loan, the lender is listed as lienholder and holds the title until you've made your final payment.

• Prequalification: A preliminary estimate of the loan amount and rate you may qualify for, based on a soft credit check that won't affect your credit score; it lets you compare lenders before formally applying.

• Origination fee: An upfront fee some lenders charge to process a new loan, often expressed as a percentage of the loan amount. Compare origination fees across lenders when shopping for a personal loan.

Sources:

• CFPB: Auto Loans

• myFICO: What Is a Credit Score?

• FDIC: Consumer Resource Center

Summary generated by AI, verified by MoneyLion editors

Jasmin Baron, CCC™, contributed to editing this article.

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