You can technically buy anything you want with a personal loan, including a car. However, it may not be the best idea to use a personal loan for the purchase of your next car, truck, or SUV. Personal loans work a little differently than auto loans, and may not be an advantage in every case. Let's take a look.
Personal Loans vs. Auto Loans
Personal loans work differently than auto loans and this may be a deciding factor in whether or not you go for one. Personal loans are unsecured loans, and typically have a shorter loan term and potentially higher interest rates than an auto loan.
Since there's nothing to secure a personal loan, interest rates tend to be higher. Rates are typically lower in an auto loan because the lender can use the vehicle as collateral, and come to repossess it if you stop paying.
Personal loans can technically be used for any reason, including the purchase of a car, but the higher interest rate may not be worth it, especially with the cost of cars continuing near record highs right now.
Additionally, if you're struggling with credit issues, getting a personal loan may not be easy. If you need to finance a vehicle with poor credit, there are lenders available to help make it happen. Getting a bad credit car loan could be easier than getting a personal loan with bad credit, depending on your situation.
Rather than using a personal loan to buy a car with no strings attached, an auto loan may save you over time. The point isn't to get the biggest loan you can, but to get a big enough loan to finance an affordable, reliable vehicle.
Are Personal Loans Bad?
Personal loans are neither good nor bad, but they can turn out to be either depending on how you handle them. If you make all your payments on time, a personal loan — like an auto loan — can help you build your credit.
On the other hand, if you mismanage your personal loan, make late payments, or miss a payment altogether, this will also be reflected by a drop in your credit score. This could result in the inability to get a loan in the future.
Can I Use A Personal Loan For A Down Payment?
Though a personal loan can be used for nearly any purpose, a down payment on a car loan is typically not accepted by auto lenders. In fact, it may be more difficult to get a car loan if the lender sees you just took out a personal loan. Besides, even if you do still qualify for an auto loan, you'll be left paying for two loans instead of one.
Additionally, lenders like to see you invest your own savings into an auto loan down payment. It's been shown that borrowers who use a larger down payment are more likely to repay their loan since they're already invested in the process financially.
If you can't come up with the cash for a down payment, you can also use any equity in your current vehicle toward your next car.
Are Personal Loans Secured Or Unsecured?
Personal loans are a form of unsecured loan that comes from a bank, credit union, or online lender. This means there is nothing backing up the loan as collateral. Collateral is something physical that a lender can repossess, such as a car or a house.
A personal loan does have the same repercussions, so if you fail to make your payments you may find yourself facing penalties such as late fees, or your entire balance coming due at once. If you continue to not repay an unsecured loan you will find yourself with increasingly low credit scores, and may even face the closure of your credit cards.
Are Personal Loans Installment Or Resolving?
Personal loans are a form of installment credit, which means you repay them gradually over time. Revolving credit is the type of credit you find in a credit card, where you have a balance you can spend against, as long as you're making minimum payments.
Installment loans have set payments that you must make every month or you can face consequences such as collections and negative marks on your credit for seven years.