According to Consumer Reports, the average price of a new car in America topped $47,000 at the end of 2021. That’s a lot of money. Even used cars can run as much as $20,000 if you want something decent. Most consumers don’t have that in their savings account, so they need to take out a loan for a new car. Should you apply for a personal loan or an auto loan?

When it makes sense to buy a car using a personal loan

Personal loans are most common with buying used cars. The amounts are smaller and being able to negotiate as a cash buyer can help lower the price even further. Personal loans can also be used to cover the down payment on a new car, with the remainder paid for with an auto loan, but that’s tricky. Taking out the personal loan first might block approval on the auto loan.

Reasons why you shouldn’t use a personal loan to buy a car

There are several reasons not to do this. It’s more expensive to pay off a personal loan because the interest rates and fees are higher than those on an auto loan. Personal loans are also more difficult to get approved for, and you may be limited by the amount that the lender will allow you to borrow. Choose the auto loan. It just makes more sense.

Pros & Cons of using personal loan for car purchase

Freedom to spend on what you likeBorrowing limit might be too low
Multiple lenders to choose fromHigher interest rates
Buyer can negotiate with cashEffect on credit score and credit mix

With a personal loan, the borrower isn’t restricted by spending guidelines. That means that you can negotiate with the seller as a cash buyer, which could bring the price of the car down. There are also more personal loan lenders than auto loan lenders, so you have more choices for where to get your money from. That includes dozens of online lenders.

On the downside, the limit you can borrow as an unsecured personal loan might not be enough to cover the cost of a new car. Even if it does, the interest rate will be higher than what you’ll get with an auto loan and you won’t be adding to your credit mix, which is a factor used in calculating your credit score. Lenders like to see variety in that category.

Factors to consider when taking a personal loan for car purchases

The appeal of being able to spend your loan funds on anything you like may be tempered when you review the interest rates and fees for a personal loan. Auto loans are cheaper and easier to get approved for because auto dealers have more leverage with lenders. Even applicants with low credit scores can get approved for an auto loan. We’ll cover more on that below.

Another factor to keep in mind is the amount of the loan you’ll need to buy a car. Personal loans are typically unsecured, meaning the lender is taking on most of the risk. Asking for a personal loan of $45,000+ without posting security or collateral may not get you positive results. Auto loans are secured by the auto. Personal loans aren’t.

Car loans for bad credit

Some car dealers guarantee approval regardless of credit score. Be careful with those because they may not be offering traditional auto loans. Dealers that do “buy here, pay here” arrangements are basically their own lender. You’ll pay a high interest rate on those deals, much more than either a traditional auto loan or a personal loan.

Legitimate lenders will finance a car buyer with bad credit because the car acts as security for repayment of the loan. If you don’t make your payments, the lender will repossess the car. They’ll still lose money on the deal because cars depreciate as soon as you drive them off the lot, but risk is mitigated for them by using the vehicle as security.

Personal loans Vs Auto loans

Most people think “auto loan” when they go out to buy a car, but it is possible to take out a personal loan to pay for it. The difference is that personal loans don’t come with specific spending requirements. You can use the funds for anything you like, including a car or a down payment on a car. You could also use it to buy accessories for your new car.

With an auto loan, the only thing the borrower can spend the money on is the car. The transaction is typically conducted between the auto dealer and the lender, so the borrower doesn’t see any of the cash. They simply get the bill very month. Any extras required by being a new car owner will need to be paid through other means.


Yes, you can use a personal loan for a down payment on a car, but taking one out may affect the approval process for an auto loan to pay off the remainder. It’s best to save for the down payment or ask about “no down payment” options, which most dealers have.