Should You Get a Personal Loan to Buy a Car?
5 Min Read | Last updated: August 9, 2024
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You’re usually best off with an auto loan when you buy a car, but there are a handful of special situations where a personal loan may be a better bet.
At-A-Glance
- In most situations, buyers will likely find it more economical to use an auto loan, not a personal loan, to pay for a car.
- Personal loans usually are more flexible but also harder to get and more expensive than auto loans.
- There are some circumstances, however, when using a personal loan to finance a car purchase could work in your favor.
If you need to borrow to buy a car, should you consider getting a personal loan?
Many buyers in many situations will likely find it more economical to apply for an auto loan from either a bank or the car dealer. These loans are generally less expensive and easier to get. There are exceptions, however, and times when it makes more financial sense to opt for a personal loan to pay for your vehicle.
About 42% of new car purchases were financed in 2023,1 and auto loans and personal loans are two of the most common ways. (Leasing is another option — for more, read “How Does Leasing a Car Work & How Much Does it Cost.”) Auto and personal loans both have their pros and cons, outlined below.
Auto Loans vs. Personal Loans
Auto loans are “secured” loans. In other words, the car you buy serves as collateral for the loan, and if you fall behind on your payments the lender can take back the car.2 You pay off an auto loan in fixed monthly installments and, much like a mortgage, the lender retains ownership until you make the final payment.
Because auto loans are secured, they are usually less risky for the lender. This is reflected in the interest rate, which is usually lower than personal loan rates. Some car loans are for 36, 48, or 60 months, and the shorter the term, the higher the monthly payment. Auto loans are usually made either by a bank or a car dealer, and you may still get one even if your credit history is spotty — though you will probably pay a higher interest rate.
Personal loans are usually unsecured and do not have to be used for any specific purpose; you use the funds at your discretion. Like auto loans, they are paid off in fixed amounts each month.
Personal loans are made by banks or other lending institutions and have flexible repayment periods that can range from months to several years.3 The longer the loan, the less you will have to pay each month, but you may end up paying more in interest over the life of the loan.
Because there’s no collateral associated with unsecured personal loans, lenders generally charge a higher interest rate to compensate for the greater risk they are taking.4 For the same reason, personal loans are sometimes more difficult to qualify for than auto loans, as lenders scrutinize potential borrowers more closely. If you don’t have a solid credit rating, your interest rate will be higher and the loan will be riskier for you personally.5
Finally, some personal loans may limit what you can use them for. A personal loan from Amex, for example, can be used only for the down payment on a car, not the entire purchase.
Reasons for Buying a Car with a Personal Loan
So why would anyone bother to apply for a personal loan to buy a car, when they could get an auto loan more easily and for less money? Here are a few instances when using a personal loan to purchase a vehicle could work in your favor:
- When you’re buying a car from another person — not a dealer. While a bank may consider giving you an auto loan to purchase a car from another person, it can be a time-consuming process that requires a lot of patience and cooperation on the part of the seller. People looking to sell a used car generally tend to want a quick deal from a buyer who can pay in cash, and waiting around for a bank to decide whether their car meets the bank’s lending requirements isn’t something they’re typically inclined to do. In this or similar situations, the transaction may go more smoothly if you tap a personal loan for the funds.
- When you don’t want to fully insure the car. You may find that the auto loan lenders you're researching require buyers to carry “full coverage” car insurance on the vehicle, including collision and comprehensive coverage. Using a personal loan to buy a car is a way around this and makes sense when the cost of the insurance is greater than the loss you would incur if the car is damaged or stolen. If you want to buy an older car for a high-risk, 16-year-old driver, for example, the higher interest on a personal loan plus the cost of liability insurance may be a less expensive alternative than taking out an auto loan and footing the bill for a comprehensive auto policy.
- When you’re buying a car that needs work or special care and may not be road-worthy. Most banks won’t make auto loans for a car that can’t be driven, making it difficult to finance a vintage or damaged car that requires work or special handling. Under these circumstances, applying for a personal loan to pay for the car may be your best option.
How to Get a Personal Loan for a Car
Here are a few tips, if you decide that applying for a personal loan to finance your vehicle is your best move:
- Shop around for the best interest rate, as these can vary considerably.
- Determine the total amount you’ll end up paying the lender. This can help you find the loan that will cost you the least overall.
- Make sure you can afford the monthly payments.
- Check whether the interest rate is fixed or variable. With a fixed rate, you’ll never have any surprises, while a variable rate can rise or fall — taking your monthly payment up or down with it.6
The Takeaway
Personal loans sometimes make sense when buying a car, even though auto loans are generally less expensive and easier to get. When you’re buying a car from a person rather than a dealer, looking to avoid costly full-coverage car insurance, or buying a damaged or older car that can’t be driven, you may be better off using a personal loan to finance your vehicle.
1 “State of the Automotive Finance Market Q4 2023,” Experian
2 “Title Loan vs. Secured Loan,” Experian
3 “What Is a Personal Loan?,” Experian
4 “Personal Loans: Secured vs. Unsecured,” MyCreditUnion.gov
5 “Is it Easy to Get a Personal Loan?,” Experian
6 “Fixed-Rate vs. Variable-Rate Car Loans: Which Is Better?,” Experian
Elliot Kass is a journalist who has covered global business and technology from New York, London, and San Francisco for more than 30 years.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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