Can You Use A Personal Loan To Buy A Car?

Key takeaways

  • A private mortgage may be a good suggestion to finance a used automobile if typical financing isn’t accessible or in case you can’t qualify for an auto mortgage.
  • Charges may be greater and compensation phrases shorter, in comparison with conventional auto loans.
  • You could possibly keep away from repossession of your car in case you default on a private mortgage.

Except you may pay money, you’ll possible have to finance a car. Most consumers do. Nevertheless, an auto mortgage isn’t your solely choice.

Private loans can be utilized for nearly any function — together with shopping for a automobile. Relying on the circumstances, it could even make extra sense than getting an auto mortgage. That stated, there are a number of drawbacks to concentrate on earlier than selecting this feature.

When to make use of a private mortgage for a used automobile or new automobile

A private mortgage isn’t most consumers’ first thought, however it could possibly be helpful in sure eventualities.

1. Typical financing is just not accessible for the car

For those who’re contemplating shopping for an older automobile, it could not at all times be potential to safe typical auto financing. Some lenders could refuse to finance a car that’s greater than 10 years previous. You might also discover that lenders require automobiles to have lower than 100,000 miles.

2. Your credit score is just not ok for an auto mortgage

When you’ve got less-than-ideal credit score, getting a automobile mortgage could also be tough. In some circumstances, you could solely qualify for financing at a buy-here, pay-here lot, which may be extraordinarily expensive.

Debtors who’ve a subprime credit score rating pay the very best rates of interest. The common rate of interest on a subprime automobile mortgage throughout the fourth quarter of 2023 was 18.89 p.c for used automobiles and 12.28 p.c for brand new automobiles, in line with Experian.

Subprime lenders ought to solely be thought-about in case you have no different choices accessible. Looking for a private mortgage could present a greater various. Some lenders even supply very bad credit loans, which can end in a extra aggressive supply because of extra versatile credit score necessities.

It’s price noting, although, that charges on very bad credit private loans additionally are typically excessive. Debtors with FICO scores between 630 and 689 obtain common private mortgage rates of interest between 17.80 p.c and 19.90 p.c.

Earlier than submitting a proper utility, think about prequalifying for a mortgage with a minimum of three lenders. This may permit you to examine actual gives side-by-side and determine whether or not a private mortgage is the very best route, with out impacting your credit score.

3. Your private mortgage charge is decrease than an auto mortgage charge

Unsecured private mortgage rates of interest are typically greater than auto mortgage charges. However in case you have excellent credit score, you could qualify for a aggressive curiosity supply. Some private loans include beginning charges as little as 7.49 p.c. That’s decrease than the typical tremendous prime charge for a used automobile mortgage, which is 7.66 p.c.

Nevertheless, in case you qualify for a low curiosity private mortgage, you might also qualify for particular auto mortgage offers as properly. This might imply a major rebate and even zero p.c financing in your auto mortgage. So, be sure to examine into each choices to see which might be the smarter monetary alternative.

Utilizing a private mortgage vs. utilizing an auto mortgage to purchase a automobile

Auto loans and private loans are related in that they’re each installment loans. Meaning you’ll make month-to-month funds over a set time frame. They each include a hard and fast rate of interest.

Your revenue and credit score historical past will likely be key to getting accepted with both kind, however there are additionally some key variations.

Private mortgage Auto mortgage
Will be secured or unsecured Secured
Can be utilized for a number of functions Restricted to car financing
Sometimes, greater rates of interest and shorter mortgage phrases Decrease rates of interest and prolonged mortgage phrases

Utilizing a private mortgage

Private loans can be utilized to cowl the price of completely different monetary wants, from medical bills to the prices of a marriage or debt consolidation and sure, a automobile buy.

Nevertheless, most private loans are unsecured, which means they don’t require collateral. As a result of the mortgage is riskier for the lender, the curiosity on a private mortgage tends to be greater.

Moreover, the compensation timeline could also be shorter. Most lenders cap mortgage phrases to 5 years.

Utilizing an auto mortgage

An auto mortgage is a secured mortgage particularly designed for purchasing a car. The car is collateral. This implies the automobile may be repossessed if the mortgage turns into delinquent otherwise you default.

Due to the decrease threat, lenders have a tendency to supply extra favorable rates of interest and phrases on these loans. In addition they could supply mortgage phrases of as much as seven years, which means a smaller month-to-month cost.

Execs and cons of utilizing a private mortgage to purchase a automobile

Although private loans could be a good various to finance a automobile, they might not be the correct choice for you. Think about the next elements when making a alternative.


  • Quick entry to money
  • Some lenders supply next-day and even same-day funding. This may be helpful if you wish to use the mortgage to purchase a automobile from a non-public vendor, as it is possible for you to to behave faster.
  • No downpayment 
  • Although a down cost isn’t at all times required to get an auto mortgage, it’s typically inspired that will help you get a decrease rate of interest. By utilizing a private mortgage, you keep away from having to place 10 or 20 p.c of the automobile’s buy value to get a greater mortgage.
  • No collateral
  • Though some private loans are secured, many aren’t. When you’ve got good credit score, you could be eligible for an reasonably priced unsecured mortgage. You received’t put your automobile on the road in case you can’t make funds, although the lender might nonetheless sue you in case you default.


  • Greater rates of interest
  • As a result of there’s no collateral to reassure the lender, the typical private mortgage charge is greater than the typical auto mortgage charge. Charges may be as excessive as 36 p.c — although these charges aren’t remarkable for very bad credit auto loans.
  • Greater month-to-month cost
  • Private loans are likely to have greater charges and shorter compensation phrases. Meaning you possibly can find yourself with the next month-to-month cost than in case you took out an auto mortgage.
  • Restricted quantities
  • Private mortgage lenders are likely to restrict mortgage quantities and time period lengths primarily based on creditworthiness. When you’ve got poor credit score, you could not be capable to get a mortgage excessive sufficient to cowl the complete value of your required car.

The underside line

When shopping for a used automobile, a private mortgage can typically be the way in which to go, fairly than a standard auto mortgage. That is very true in case you can’t qualify for conventional financing or if you wish to personal the title of your car instantly.

Nevertheless, as a result of these loans are sometimes unsecured, they might include greater rates of interest and shorter compensation phrases than many vehicle loans.

Earlier than deciding, think about using a mortgage calculator to crunch the numbers and decide which choice makes essentially the most sense financially.

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