You can buy a vehicle with a personal loan, since they can usually be used for whatever you’d like. However, the interest rates with a personal loan aren't the best, and they vary quite a bit. If your credit score isn’t great, it may be a better idea to go with a regular auto loan.
Using a Personal Loan for a Vehicle
Personal loans are offered by direct lenders, such as those from credit unions, banks, or some online lenders. Your credit score is a major factor in determining your eligibility for these loans, as well as the terms you qualify for. Major financial institutions tend to have higher credit score requirements for loan approvals. With a poor credit score, it’s difficult to get approved for a personal loan.
Typically, the interest rate for a personal loan can be anywhere from 5% to 36%. The length of these loans varies, too, generally lasting between one to five years (or 12 to 60 months). While some personal loans can be as long as 60 months, most only last for a couple of years. If you buy a car with a personal loan, it could mean high monthly payments that can be hard to manage.
The main reason personal loans have higher interest rates is because they aren’t secured by anything, unlike an auto loan that's secured by the vehicle you purchase. However, this also means that there isn’t a lien on your car if you buy it with a personal loan. If you need to sell it before you paid off the loan, you can. But, even if you don’t have the vehicle anymore, you still have to pay off the loan eventually.
A big advantage of using a personal loan for a car is that there typically isn’t a down payment requirement. Many auto lenders require borrowers to provide a down payment – it’s been shown that borrowers that put down cash have a higher chance of completing the loan. Having a down payment is often referred to as having “skin in the game,” and it tells lenders that you’re willing to lay down your own cash.
Because there isn’t a down payment requirement, having a down payment doesn’t really improve your chances of getting approved for a personal loan – it’s mainly your credit score that direct lenders are concerned with. With car loans, having cash to put down can increase approval odds because you’re invested in the vehicle.
Using an Auto Loan for a Car
On average, auto loans are easier to get approved for because there are many types of lenders that work with all sorts of credit situations. Car loans are offered by many different types of lenders as well, such as direct lenders, third-party lenders, and the captive lenders of automakers.
Since there’s so much variety in auto lending, the rates and terms vary, too. A car loan’s interest rate can be anywhere from 0% to 20% (sometimes even higher). Auto loan terms vary as well, usually lasting anywhere from 48 to 84 months, depending on the price of the vehicle, the lender, and your personal situation. The better your credit score, the lower interest rates you can usually qualify for.
With a secured car loan, the vehicle is the collateral. This means if you default on the loan, the lender can hire a recovery company to repossess the car. A repo’d vehicle is usually sold at auction in an attempt to cover your remaining loan balance. This is very different from a personal loan, since the car and the loan aren’t tied to each other. You also can’t sell a vehicle with a lien on it until the loan is paid off, or you get a trade-in offer from a dealer or private seller that's high enough to cover the loan balance.
While a car can be repossessed if you default on the loan, it also means that interest rates tend to be lower for auto loans than personal loans because the vehicle is collateral.
The biggest advantage of going for a car loan over a personal loan is that you’re likely to have a better chance of getting approved if your credit is worse for wear. There are many dealerships signed up with bad credit auto lenders all over the country. With a lower credit score, it can be difficult to find lenders that can assist you. However, subprime car loans from subprime lenders are reported to the major credit bureaus. If you qualify for subprime financing, you can improve your credit score with your on-time payments and get the vehicle you need.
Get Matched to a Local Dealership
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