Should You Get a Personal Loan to Buy a Car?

If you need to borrow to buy a car, should you consider getting a personal loan? 

Most buyers in most situations will likely find it more economical to apply for an auto loan from either a bank or the car dealer. These loans are generally less expensive and easier to get. There are exceptions, however, and times when it makes more financial sense to opt for a personal loan to pay for your vehicle. 

About 65% of new car purchases were financed in 2021,¹ and auto loans and personal loans are two of the most common ways. (Leasing is another very popular option – for more, read “How Does Leasing a Car Work & How Much Does it Cost.”) Auto and personal loans both have their pros and cons, outlined below.

Auto loans are “secured” loans. In other words, the car you buy serves as collateral for the loan, and if you fall behind on your payments the lender can take back the car. You pay off an auto loan in fixed monthly installments and, much like a mortgage, the lender retains ownership until you make the final payment. 

Because auto loans are secured, they are less risky for the lender and this is reflected in the interest rate, which is usually lower than personal loan rates. Most car loans are for 36, 48, or 60 months and the shorter the term, the higher the monthly payment. Auto loans are usually made either by a bank or a car dealer, and you can usually still get one even if your credit history is spotty – though you will probably pay a higher interest rate. 

Personal loans are usually unsecured and do not have to be used for any specific purpose; you use the funds at your discretion. They typically range from $1,000 to $50,000, and, like auto loans, they are paid off in fixed amounts each month. 

Personal loans are made by banks or other lending institutions and have flexible repayment periods that can range from 12 to 36 months or more. The longer the loan, the less you will have to pay each month, but you will end up paying more in interest over the life of the loan. 

Because there’s no collateral associated with most personal loans, lenders generally charge a higher interest rate to compensate for the greater risk they are taking. For the same reason, personal loans are also harder to get than auto loans, as lenders scrutinize potential borrowers more closely. If you don’t have a solid credit rating, there’s a good chance that you won’t qualify for this type of loan. 

Finally, some personal loan providers prohibit using the loan to buy a car. A personal loan from Amex, for example, can be used only for the down payment on a car, not the entire purchase.

So why would anyone bother to apply for a personal loan to buy a car, when they can get an auto loan more easily and for less money? Here are a few instances when using a personal loan to purchase a vehicle could work in your favor: 

• When you’re buying a car from another person – not a dealer. While a bank will sometimes consider giving you an auto loan to purchase a car from another person, it can be a time-consuming process that requires a lot of patience and cooperation on the part of the seller. People looking to sell a used car generally tend to want a quick deal from a buyer who can pay in cash, and waiting around for a bank to decide whether their car meets the bank’s lending requirements isn’t something they’re typically inclined to do. In this or similar situations, the transaction may go more smoothly if you tap a personal loan for the funds.

• When you don’t want to fully insure the car. Standard auto loans require the buyer to carry “full coverage” car insurance on the vehicle, including collision and comprehensive coverage. Using a personal loan to buy a car is a way around this and makes sense when the cost of the insurance is greater than the loss you would incur if the car is damaged or stolen. If you want to buy an older car for a high-risk, 16-year-old driver, for example, the higher interest on a personal loan plus the cost of liability insurance may be a less expensive alternative than taking out an auto loan and footing the bill for a comprehensive auto policy.

• When you’re buying a car that needs work or special care and may not be road-worthy. Most banks won’t make auto loans for a car that can’t be driven, making it difficult to finance a vintage or damaged car that requires work or special handling. Under these circumstances, applying for a personal loan to pay for the car may be your best option.