Get behind the wheel: how a personal loan can help you buy a car

The road less traveled can still get you to your destination. So let's explore an unconventional approach to buying a car. Just because most people finance their cars with car loans doesn't mean that's the only way to do it.

It's your journey. You decide which road to take.

Can you use a personal loan to buy a car?

You can use a personal loan to buy a car. In fact, personal loans can be used to buy just about anything, unless it's something specifically excluded by the lender you choose. For instance, not all lenders will approve a personal loan for starting a business.

Personal loans are commonly used for big expenses, such as:

• Paying off credit cards

• Home improvements

• Medical expenses

• Travel expenses

• Hardships or unexpected expenses

• Car purchases

• Paying tax debt

What is the difference between a personal loan and a car loan?

Each financing option has its own pros and cons. Here's a quick side-by-side comparison of a personal loan and a car loan:

Use of funds

A personal loan can be used for almost any expense allowed by the lender, and that typically includes purchasing a vehicle. An auto loan, on the other hand, can only be used to buy a vehicle.

Secured vs. unsecured

Car loans are secured loans. The vehicle acts as the guarantee that you'll repay the loan. If you stop making payments, the lender can sell the car to recover some or all of its losses.

Most personal loans are unsecured loans. Nothing backs up the loan except your word that you'll repay it. That means you qualify based entirely on your credit standing and financial profile, not by having something of value to sign over to the lender as a guarantee.

Loan term

Personal loan repayment terms typically range from two to six years. Car loans tend to last from three to seven years, though they can sometimes extend as long as eight years.

A longer repayment term can bring the monthly payment amount down.The downside is that a longer term adds more interest over the life of the loan.

Down payment

It's rare to find a personal loan that requires a down payment, while many auto loan lenders prefer one. A down payment creates an upfront expense, since you'll usually need to make the down payment out of pocket.

You might skip the down payment for an auto loan if you have a strong credit profile, sufficient income, and low existing debt. Down payment requirements vary a lot between auto lenders.

Interest rate

In general, secured loans have lower interest rates than unsecured loans. Because an auto loan is secured by the vehicle, the lender takes on less risk by letting you borrow the money. If you stop paying, the lender has a way to get back some or all of this money.

Personal loan lenders don't have the same options, so they tend to charge more for the loan to make up for the extra risk. As a result, personal loan rates tend to be higher than auto loan interest rates for the same borrower.

Insurance requirements

When you get an auto loan, the lender will typically require full insurance to protect the collateral (the vehicle). Full coverage includes liability, collision and comprehensive insurance.

However, if you use an unsecured personal loan instead of an auto loan, the vehicle isn't tied to the loan. So the loan isn't dependent on the amount of insurance you have—or don't have.

This may allow you to get a less expensive policy than if you needed full coverage for an auto loan. Make sure your insurance is adequate to cover any issues if the car is totaled or stolen, however, since you'll still owe the personal loan no matter what happens to the vehicle.

Qualification requirements

To qualify for a personal loan, you need to meet the lender's credit, income, and existing debt standards. But the vehicle you're purchasing isn't part of the equation, since it's not needed to secure the loan.

For a car loan, you have to meet similar credit and financial standards, plus the lender will want to know the value of the vehicle you intend to purchase. Since the car is backing up the loan, the lender will want to know that it's worth at least as much as you intend to borrow.

When it might make sense to use a personal loan to buy a car

Everyone's financial situation is unique, and getting a personal loan to buy a car may be the best choice for you. Here are some times when it might make sense to use a personal loan to buy a car.

You don't want your car to guarantee the loan

With a car loan, the lender puts a lien (a legal claim) on the car. Because of that lien, you would need to satisfy the debt (pay off the loan) when you sell the car. It also means that if you don't keep up your end of the bargain by making your loan payments as agreed, the lender has the right to take steps to sell the car and recover the money you owe.

There isn't a lien on things you buy with an unsecured personal loan. In fact, once the loan money is in your bank account, the lender isn't likely to ever ask you how you used the money. Since there's no lien, you can sell the car whenever you want to, even if you haven't paid off the loan yet.

Some vehicles are not eligible for auto loans

Auto loan lenders don't approve loans for every type of car. Salvaged or damaged vehicles might not qualify for an auto loan. Collectible or kit car loans are available from a handful of lenders, but the credit requirements tend to be stiff. Also, some loans advertised as collectible car loans are actually personal loans.

You don't want to pay for full coverage insurance

If an auto lender has a lien on your car, they'll usually require full coverage insurance so they won't experience a financial loss if the car is wrecked or stolen.

If you're buying a new vehicle, you likely want full coverage anyway to protect your purchase. In other cases, however, full coverage could be overkill. If you want to avoid costly full coverage insurance, using a personal loan could be one way to do that.

Possible downsides to using a personal loan to buy a car

A personal loan could bring extra flexibility to buying a car, but it's not the right answer for every carbuyer. Consider an auto loan instead if:

• You canget a lower interest rate with an auto loan. Auto loans tend to have much lower interest rates than personal loans for the same borrower since they're secured by the vehicle.

• You qualify for a discount through the lender or dealership. Auto lenders and dealerships tend to offer incentives and interest rate deals that personal loan lenders can't match.

• You don't want to pay origination fees. Many personal loan lenders charge origination fees to process your loan. These can reach 10% or more of your loan amount.

• You need more time to pay. Auto loans tend to have longer term options than personal loans, which could give your budget vital breathing room on a five-figure vehicle purchase.

What would a personal loan for a car cost each month?

As with most loans, your monthly payment for a personal loan depends on the:

• Size of the loan

• Repayment term

• Interest rate

• Fees

A larger loan or a higher rate raises the monthly payment. A longer term lowers the monthly payment but could cost you a lot more in interest fees.

Let's look at an illustrative example. We'll assume a $20,000 personal loan with a 15% APR. Here's what a personal loan could cost depending on the loan term:

You can use an online calculator to compare your potential personal loan payments with the payments you might see on an auto loan. Make sure to include any fees in your calculations.

How to choose a loan to buy a car

The best loan for buying a car is the one that aligns with your priorities. Consider what's important to you:

• Annual percentage rate (APR): APR factors in both the interest rate and common loan fees. Compare the total cost of both loan types for the same amount and term.

• Monthly payment: Auto loans may have longer repayment term options and lower rates, which generally mean lower monthly payments.

• Down payment requirement: Personal loans don't require a down payment, while some auto lenders might.

• Insurance requirement: Unsecured personal loans don't have auto insurance requirements.

• Bad credit options: Car loans may allow lower credit scores.

The one thing you don't have to do is what everybody else does. The right move for you could be very different from the right move for someone else.

Ready to start exploring your options? Check your estimated rate through Achieve Personal Loans with no impact to your credit score.