A lot of people who purchase cars rely on loans to pay for them; many of them use auto loans, but you can also use a personal loan. After all, buying a car is expensive. You need a loan if you don’t have enough cash on hand to purchase a new car or one that is unfamiliar to you.
Personal and vehicle loans differ in a few important ways. The best loan type for you will depend on your unique circumstances. Therefore, even though your friend’s use of an auto loan made sense, it might make more sense for you to purchase a car with a personal loan.
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Used cars these days typically cost more than $25,000, so financing your purchase is probably required before you can take delivery of your new vehicle. However, you may be debating whether getting a personal loan or an auto loan is preferable for buying a car.
Auto loans are generally the best option, but we can assist you in determining whether a personal loan is more appropriate for your particular circumstance.
Can I use a personal loan to buy a car?
You can purchase an automobile with a personal loan if you are eligible for one.
The flexibility of personal loans is among their most alluring features. Except in a few rare cases, you can use them for nearly anything. For example, you may not be able to use your personal loan for investing, but it shouldn’t be a problem to purchase an automobile.
However, most borrowers don’t use personal loans to finance car purchases because of the higher interest rates and stricter credit requirements. Actually, in 2023’s third quarter, borrowers utilized just 1 3% of all personal loans for car financing.
Personal loan vs. auto loan: Key differences
Collateral is a fundamental distinction between personal loans and auto loans.
Personal loans are unsecured loans that don’t need collateral. Since your car acts as collateral for an auto loan, your lender, also known as a lienholder, has the right to seize your vehicle if you default on the loan.
Auto loans pose less of a risk to the lender because they can use repossession to recover the outstanding balance. Because of this, auto loan rates are usually less than those for personal loans.
The following highlights the main distinctions between auto and personal loans:
| Personal loan | Auto loan | |
|---|---|---|
| Loan purpose | Can be used for almost anything | Can only be used to purchase a vehicle |
| APRs | Typically higher (sometimes as high as 36%) | Typically lower (good-credit borrowers can find single-digit rates) |
| Credit score requirements | Harder to qualify for | Easier to qualify for |
| Down payment | Not required | May be required |
| Collateral | Typically not required | Required (vehicle acts as collateral) |
Benefits to using a personal loan to buy a car
Auto loans are specific. You may only borrow up to the cost of the car, and you may only use them to purchase an automobile. They are also typically only available if you buy a car from a dealership, unless you get a private party auto loan.
Conversely, personal loans are useful for almost anything. This implies that you can purchase a car from a dealership or a private seller using a personal loan.
Additionally, you are able to borrow more than the car’s purchase price, but doing so could be problematic. If you choose to take out a personal loan to pay for your car, make sure you only borrow what you really need to avoid accruing debt.
While many do, not all auto loans call for a down payment In addition to potentially enabling lower interest rates, a sizable down payment can keep your auto loan from going upside down.
Personal loans don’t require (and aren’t affected by) down payments.
Collateral can be used to secure personal loans, but it usually isn’t This implies that in the event of a loan default, your car is not at risk.
Should your concerns about repossession be causing you to consider a personal loan, you might want to reconsider your purchase or choose a model that is less costly. Your credit will suffer from repossession, and it will be more difficult to finance a new vehicle in the future. Taking on more debt might not be the best course of action if you have serious concerns about your ability to repay the loan.
Drawbacks to using a personal loan to buy a car
Personal loans typically have higher interest rates than auto loans, even for borrowers with good credit. When all else is equal, financing a car with an auto loan is usually less expensive than using a personal loan.
Personal loans usually have shorter repayment periods than auto loans. In early 2023, the average used car loan was 67. six months, or slightly more than five and a half years, The majority of personal loans, however, have terms between 12 and 60 months.
Your monthly loan payments will increase with a shorter loan term, even though you’ll pay less interest overall. This is due to the fact that you will have fewer months to divide your repayment into.
May not be available to bad-credit borrowers
Personal loan requirements are typically more stringent than those for auto loans because they do not utilize the vehicle as collateral. If your credit history is not good, you will pay more for any kind of loan, but if your score is below 660, you may not be able to get a personal loan. Personal loans for people with bad credit are available, but even if you qualify, you can expect rates as high as 6%.
When could buying a car with a personal loan make sense?
A personal loan might be the way to go if you’ve had your eye on a car listed by a private seller but lack the cash up front. Just make sure you can honor the terms of your loan repayment. If you default on an unsecured loan, you may be subject to severe repercussions such as credit score damage, lawsuits, and wage garnishment.
Private party loans are provided by certain auto lenders, but they can be more difficult to locate and usually have higher interest rates. A personal loan won’t have any limitations on the mileage or minimum loan amount, but auto loans used to purchase a car from a private seller might.
Buying a nontraditional car
Conventional auto loans are intended for both new and used cars that are under ten years old. Depending on the kind of vehicle you’re buying, you might not be able to get an auto loan. While some lenders provide financing for exotic or classic cars, you may choose to go with a personal loan instead (if the personal loan ends up being a better deal)
When you don’t want to make a down payment
When you purchase a car with an auto loan, you’ll typically need to make a down payment unless you have excellent credit or the dealership is having a sale. You can leave the dealership with no money down if you use a personal loan.
How to use a personal loan for a car
Since personal loans are given out in lump sums, you must determine how much you can borrow before applying. You will be responsible for paying the difference between the loan amount and the car’s purchase price if you borrow too little. If you take on excessive debt, you may find yourself tempted to spend the extra cash on unrelated purchases.
It will be easier for you to determine how much money you should apply for if you have a rough idea of the car you want to buy. Remember that it might take a few days for your money to become accessible. You might want to notify the seller in advance of your plans to purchase by sending them an email.
It’s important to consider your options carefully before taking out a personal loan, as choosing the first lender you find could result in a loan with unfavorable terms.
Personal loans are available from numerous physical banks, credit unions, and online lenders. Spend some time investigating a few, keeping a close eye on things like APRs, loan terms, origination costs, and prepayment penalties. On the personal loan marketplace of LendingTree, you can use a single form to compare rates for up to five lenders.
You must apply for your personal loan after selecting a lender. While the procedure may differ, in general, you will need to submit basic personal information and proof of income in the form of paystubs or W-2s.
Use loan funds to purchase the car
After being approved, your loan will be paid to you in full, typically by direct deposit. With cash in hand, you can buy your car. If you have any extra money, it might be a good idea to use it for things related to your car, like title transfers, insurance, or registration. Alternatively, you could utilize those money to settle the loan and reduce the amount owed.
About 30 days after the loan is disbursed, you will be required to make your first payment. Always make sure to pay on time to avoid late fees and credit damage. For added peace of mind, you might even want to set up autopay (and depending on your lender, you might even get an APR discount).
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FAQ
Is it better to get a private loan to buy a car?
Is an Auto Loan a Better Option for Paying for a Car? In general, an auto loan is preferable because it usually has a lower interest rate. Lenders view your car as collateral, which lowers the risk of the loan. Lower interest rates save you money in the long-term.
Is it cheaper to buy a car with a personal loan?
Personal loans typically have higher interest rates than auto loans, even for borrowers with good credit. When all else is equal, financing a car with an auto loan is usually less expensive than using a personal loan.
Is it easier to get a personal loan or auto loan?
Due to the fact that lenders primarily consider your income, credit score, and credit history, personal loans are usually easier to obtain. Finding a lender willing to provide a loan secured by the particular vehicle you buy is the first step in applying for an auto loan. This can get complicated in certain situations, like when you decide to purchase a used car.
Does a personal loan count as a car loan?
While auto loans are specifically used to finance the purchase of a new or used car, personal loans can be used for almost anything. Compared to auto loans, which are secured by your vehicle, personal loans are typically more expensive because they are unsecured.
Read More :
https://www.lendingtree.com/personal/can-you-use-a-personal-loan-to-buy-a-car/
https://www.td.com/us/en/personal-banking/personal-loan/can-you-use-a-personal-loan-to-buy-a-car