Personal loans can be used for many things. If you’re itching to pay off your auto loan quickly, using a personal loan could be the answer – but it could cost you more money in the long run. We’ve got some considerations to keep in mind before going through with it.
Taking Out a Personal Loan
Personal loans are offered by direct lenders from credit unions, banks, or online lenders. Some lenders offer loans anywhere from $1,000 to $100,000, with the terms usually dependent on the size of the loan and your creditworthiness. A borrower with a good credit score has a better chance of qualifying for a personal loan.
If you have a less than perfect credit score, qualifying for a personal loan can be tough. Personal loans typically aren’t secured by anything (like an auto loan where the vehicle secures the loan). Because of this, lenders may have more stringent requirements to meet.
If you make the cut for a personal loan, you could use that amount to pay off your car loan, make repairs on the vehicle, or just make a sizable dent on your car loan balance. However, you can’t use a personal loan as a down payment on a vehicle. Almost every auto lender requires that the down payment amount isn’t borrowed money.
If your goal is to pay off your current auto loan, tread carefully or it could cost you more.
Is There a Catch?
If you intend to finish off your auto loan with a personal loan, it may not be a good idea long term.
Personal loans usually come with higher interest rates than auto loans, since they’re not secured by anything. To make up for this risk, most lenders assign higher interest rates on personal loans. The interest rate for these loan types varies – they're generally around 6% to 36%.
It may make sense to use a personal loan to pay off your car if the personal loan’s interest rate is less than your auto loan. Some car loans can come with interest rates in the double-digits, especially if you had poor credit when you got the vehicle.
When a Personal Loan Makes Sense for Your Car
While personal loans may come with higher interest rates, there are a few situations where it makes sense to use one to pay off your car.
- To save money on auto insurance – When you’re financing a vehicle, you’re required to carry full coverage auto insurance. If the bill is too much to handle, paying off your car with a personal loan could mean a drop in the cost of your auto insurance to the basic coverage that meets your state’s minimums.
- To save money on interest charges – If your car loan has a high interest rate, but you qualify for a personal loan with a lower one, it could save you money.
- When you don’t qualify for refinancing – Refinancing replaces your current auto loan contract with another one. Most borrowers do this to get a lower monthly payment, but there can be a lot of requirements to make this happen. If you can’t refinance, but you want a more manageable monthly payment, a personal loan could be the answer if you can nail down a smaller payment.
- You’re deep in negative equity – Negative equity can cause problems for borrowers when they're financing a vehicle and need to get out of it. A car that’s underwater (when you owe more on the car than it’s worth), is tough to sell. You must remove the lien from your vehicle’s title before you can transfer ownership, which means paying off the loan. If you want to sell your car but negative equity is making it tough, getting a personal loan to pay off all or some of that negative equity could help.
Needing Bad Credit Resources?
Not everyone can qualify for a personal loan. A poor credit score could be reason enough for a denial. But if you want out of your auto loan and bad credit is getting in the way, we want to help at Auto Credit Express.
We’ve been helping borrowers find dealerships that have access to bad credit lenders. Don’t let bad credit get in the way of the vehicle you need, and fill out our free auto loan request form. We’ll look for a dealer in your area that can assist with poor credit.