Can you buy a car with a personal loan? | Personal loans and advice

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Buying a car can be a lot of fun, but you will likely face at least some financial limitations. If you don’t plan to pay cash for your car, you’ll need a plan to finance it.

A car loan is the natural choice, but another option you might consider is a personal loan. Car loans and personal loans have key differences, and a car loan will generally make more sense.

Can you use a personal loan to buy a car?

Yes, you can use a personal loan to buy a car. A personal loan can be used to buy almost anything not prohibited by the lender, says Ganesh Pandit, associate professor of accounting at Adelphi University.

What usually matters for approval is your perceived ability to repay the loan, not how you will use the money. The lender may ask for the purpose of the funds when disbursing the loan, but that usually doesn’t affect the loan decision, says RL Shankar, an assistant professor at Case Western Reserve University and an expert in banking and finance.

That said, it may not be a good idea to use a personal loan for a car.

Personal Loans vs Car Loans

You can use a personal loan for expenses like medical bills, home renovations, and vacations, as well as for debt consolidation.

“A personal loan is exactly what the name suggests,” says Pandit. “It’s a loan that can be used for personal purposes.”

Auto loans, on the other hand, are used specifically to purchase a vehicle.

Personal and auto loans are installment loans, which means you agree to repay the lender in fixed amounts over time. The main difference between personal loans and auto loans is that personal loans are unsecured while auto loans are secured using the vehicle as collateral.

Since personal loans aren’t backed by any collateral, they often have higher interest rates, which vary by lender and perhaps location, Pandit says.

At the same time, car loans have more lenient credit score requirements. You will want a credit score at least in the 600s for a personal loan. Lower scores in the high 500s than the low 600s could lead to higher interest rates or rejection. It’s possible to get a car loan with fair or poor credit, although you’ll pay a higher rate for it, and a score below 600 can get you declined.

“Of course, it’s possible to get a secured personal loan, in which case most of those concerns — tighter credit score requirements and higher rates — are largely ameliorated,” Shankar said. But like a car loan, a secured personal loan requires collateral.

You may be able to lower your monthly payment on a personal loan or car loan by changing to a longer loan term, but this can lead to even higher interest rates. Some lenders won’t go beyond five-year terms for personal loans. You can get car loans with terms of six or seven years or even longer, but that’s not a good idea.

With an auto loan, the lender technically owns your car until you pay off the loan. Having a lien on your vehicle means you cannot resell it without involving your lender. And if you are unable to repay your loan, the lender can repossess your vehicle.

If you are unable to repay a personal loan, the lender’s only recourse is to go to court and file for bankruptcy. “It’s not a pro or a con, but something a lot of people aren’t aware of,” Shankar says.

Benefits of using a personal loan to buy a car

  • No deposit. Personal loans don’t require a down payment, while car lenders may require one if you have a low credit score.
  • Fewer constraints. You can buy any vehicle using a personal loan, regardless of the age or mileage of the car.
  • The vehicle is not a warranty. The title to the car is in your name, with no lien on the vehicle, so the lender cannot take possession of your car if you fail to repay the loan.

Disadvantages of using a personal loan to buy a car

  • Higher interest rates. Personal loans tend to have higher interest rates, especially for borrowers with lower credit scores.
  • Stricter qualification standards. It can be harder to qualify for an unsecured personal loan.

Should you ever use a personal loan to buy a car?

Car loans are generally easier to obtain and less expensive than personal loans. Given this, would it make sense to use a personal loan to buy a car?

Generally, Pandit and Shankar are against using personal loans for car purchases, but there are a few circumstances when a personal loan may be the best option.

Circumstances in which you might want to use a personal loan to purchase a car include:

  • If you are unable to meet your auto lender’s down payment or loan-to-value ratio requirements.
  • If you want to buy an older used car, the auto lender is not ready to finance.
  • If the car lender insists on a minimum loan amount greater than the amount you wish to borrow.
  • If you want to keep the title.

Although a car loan is generally a better choice, the type of vehicle you want to buy and the limits or requirements of each type of loan will help you determine which option is best for you.

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