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?

Find the best personal loans for your car purchase

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How do personal loans to buy a car work?

Personal loans can be used for just about any reason, including buying a new (or new to you) car. After you research and compare lenders to find the best one for you, you’ll apply for the loan. This can typically be done online. Once you’re approved for the loan and accept the loan agreement, the lender will deposit the funds in a lump sum into your bank account. You can then use those funds as you would use cash to purchase a vehicle.

Once you’ve received the loan funds, you must start making the monthly payments right away to avoid fees or penalties, or damage to your credit score.

Where to get a personal loan to buy a car?

Personal loans to buy a car are offered by most banks, credit unions, and online lenders, though some lenders have restrictions on what personal loan funds can be used for, so you’ll want to make sure you’re able to use them to purchase a car.

Banks
  • Higher interest rates
  • Strictest loan qualifications
  • In-person customer service and support
  • May be more flexible with existing customers
Credit Unions
  • Must be a member of the credit union
  • Better interest rates, and federal credit unions have an interest rate cap of 18%
  • Willing to work with borrowers with poor credit
  • More flexibility with requirements
Online Lenders
  • Most flexibility with borrower requirements
  • Options for borrowers with poor credit
  • Lower interest rates
  • Fast and easy application, approval, and funding process

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 every month. Any extras required by being a new car owner will need to be paid through other means.

Learn more: Personal Loan Vs 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.

Pros and cons of using personal loans to buy a car

ProsCons
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

When you are using a personal loan for a car purchase the pros and cons need to be considered.

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.

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.

Related: Reasons to get a personal loan

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.

Pros and cons of car loans for bad credit

ProsCons
Can help build creditHigh interest rates
Get funds for vehicle purchaseFees
Online lenders and credit unions may offer a variety of optionsDamage to credit score if payments aren’t made on time
Can lose vehicle if payments aren’t made

How do I qualify for a personal loan to buy a car?

Personal loan requirements vary by lender, but there are a few common factors that are taken into consideration:

Credit score and credit history Most lenders require you to have a credit score of at least 670 to qualify for a loan, and the higher your score, the better your chances of being approved and getting a lower interest rate. However, you may find lenders that will accept credit scores of 600 and above, or even as low as 580.

They will also look at your payment history, outstanding debt, and length of your credit history.

Income Income requirements will vary by lender, but it’s important to meet the minimum income requirement to ensure you have a way to repay the loan. In some cases this can be as low as $20,000, or as high as $50,000 or more depending on the lender. You may be asked to provide proof of income, such as tax returns, monthly bank statements, or pay stubs.
Debt-to-income ratio (DTI) This is a percentage that represents the portion of your gross monthly income that goes toward paying off your debt. Most lenders prefer a DTI less than 36%, though some lenders will accept a DTI up to 50%.
Collateral or cosigner If applying for a secured personal loan, you’ll be asked to provide assets as collateral. If you’re using the personal loan funds to purchase a vehicle, it will likely be the collateral. If you default on the loan, the lender will seize your vehicle.

Or, if you plan on having a cosigner to help improve your chances of getting approved, make sure you have all of their information and their credit score, history, and income qualifies them as a cosigner.

How to compare personal loan lenders to buy a car?

As you shop around and compare personal loan lenders, you’ll want to pay attention to a few details and factors to get the best comparisons. These include:

  • Minimum requirements. Most lenders have minimum credit score, income, DTI, and other requirements. Make sure you meet those requirements; otherwise, you may not qualify for the loan.
  • Fees. Most lenders charge fees like origination fees, late payment fees, prepayment penalties, and others. Compare these fees and make sure you’re comfortable with them in the event you’d have to pay them.
  • Loan amounts. Minimums and maximums vary by lender, so make sure you find one that offers the loan amount you need.
  • Loan terms. Terms also vary by lender and typically range from 12 to 84 months. The longer the term, the lower your monthly payment but the more you’ll owe in interest. The shorter the term, the higher your payment, but you’ll save in interest. Decide which fits your budget best.
  • Interest rates. The higher your credit score, the lower the interest rate that you’ll qualify for. Compare interest rates and find the lender that offers you the lowest rate.
  • Customer service. Customer service is important if you were to have questions or issues repaying your loan. Compare ratings and reviews and find a lender you’re comfortable with.
  • Loan purpose. Some lenders have limitations on what a personal loan can be used for. Make sure you can use the loan funds to purchase a vehicle.

One of the best ways to compare lenders is to get prequalified when you can. This doesn’t affect your credit score, so you can get prequalified with as many lenders as necessary. Enter information like your credit score and desired loan amount and term, and get an estimate of your interest rate, monthly payment, loan amount and term, and other details.

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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.

How do I apply for a personal car loan?

The steps to apply for a personal car loan include:

  1. Check your credit score and history. If necessary, take steps to improve your score to ensure you get the lowest interest rate and best term possible.
  2. Compare lenders. Do your research to find the best lender for you with the lowest interest rate, desired loan amount and term, and great customer service.
  3. Get prequalified. It won’t affect your credit score but can help you compare lenders more accurately.
  4. Apply. Most loan applications can be completed online in just a few steps. Supply all of the requested information and provide proof of income, identity, employment, and whatever else is required. This can help your approval process go more quickly.
  5. Accept the loan and get the funds. Once approved, you’ll accept the loan agreement, and the funds will be deposited into your bank account in a lump sum.
  6. Repay the loan. You’ll start making the monthly loan payments to repay the loan right away, so be sure to budget appropriately so that you don’t miss a payment.

FAQs

When you first apply for a loan, it triggers a hard credit inquiry, which will lower your score by a few points for a short period of time, and it will remain on your credit report for two years. Your score can also be negatively affected if you make payments late or miss payments altogether. However, if you make your payments on time and pay down your loan, your score may improve.

This depends on a few factors like the type of car you want to buy (because some lenders have restrictions on vehicles they will finance) and whether you want to be a cash buyer (because a personal loan is used as cash). However, personal loans may have higher interest rates depending on your credit score and the lender, and they typically aren’t available at dealerships (if that’s where you’re buying the vehicle). Both have pros and cons, so compare your options carefully to find the best one for you.