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

By Aaron Crowe

Reviewed by Kimberly Rotter

Apr 29, 2023

Read time: 5 min

Family with two kids . Moment with hugs near car

Key takeaways:

  • A car loan isn’t the only way to finance a vehicle purchase.

  • You can use a personal loan just about any way you want to.

  • Personal loans don’t use your car as collateral.

Roads less traveled can still get you to your destination. So let’s dig into 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 used for big expenses all the time, such as:

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

Use of funds

A personal loan can be used for almost any expense, including a car. A car loan, on the other hand, can only be used to buy a car.

Loan term

Personal loan repayment terms typically range from two to five years. Car loans tend to last from five to seven years and can be as long as eight years. A longer repayment term can bring the monthly payment amount down, but you’ll pay more in interest over the life of the loan. 

Secured vs unsecured

Car loans are secured loans. The car is the guarantee that you’ll repay the loan. If you stop paying, the lender can sell the car to recover some or all of its losses. 

Most personal loans are unsecured loans. That means you qualify based on your credit standing, not by having something of value to sign over to the lender as a guarantee.

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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 to make a down payment

Some auto loan lenders require a down payment. You don’t have to make a down payment to get a personal loan. 

You don’t want your car to guarantee the loan

With a car loan, the lender puts a lien on the car. Because of that lien, you would need to satisfy the debt (pay off the loan) before you could sell the car. It also means that if you don’t keep up your end of the bargain (make your loan payments), 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 your loan funds are 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 if you want to, even if you haven’t paid off the loan yet. 

Some cars are not eligible for car loans

Auto loan lenders don’t approve loans for every car on earth. 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 inevitably require full coverage insurance so they won’t experience a financial loss if the car is wrecked. 

Full coverage is expensive. If you want to purchase liability coverage only, buy the car using a personal loan.  

Possible downsides to using a personal loan to buy a car

Personal loans aren’t the best solution in every situation. You know more about your finances than anyone else. Consider other options if:

  • You can save a lot of money by going with an auto loan. Sometimes auto lenders offer deals that personal loan lenders can’t match. 

  • You need more time to pay. Auto loans tend to have longer term options. 

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:

  • Lowest interest rate: compare both loan types 

  • Lowest monthly payment: car loans may have longer repayment term options

  • Down payment requirement: personal loans don’t require a down payment

  • Insurance requirement: personal loans don’t require full coverage on the car

  • Lien on property: personal loans don’t require a lien

  • Bad credit options: car loans may allow lower credit scores

The one thing you don’t have to do is what everybody else does.

Aaron Crowe

Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

Most lenders require at least a 620 credit score to qualify for a personal loan, but some allow applicants with at least a 580. 

Yes. Having bad credit doesn’t exclude you from getting a car loan, though you may pay higher interest rates. One way to improve your chances of getting a more affordable loan is to apply with a qualified co-applicant.

A higher credit score is the best way to get a low interest rate on a loan. Most lenders offer several interest rates for the same loan. You’ll be offered the rate that corresponds with your credit score tier. 

Ask the lender what credit score is required for the next lower interest rate. If you’re only a few points away, you might postpone your loan application until you’ve had a chance to take steps to raise your score. 

The two things that affect your score the most are your payment history and the amount of credit card debt you have. Pay all of your bills on time, clear up collection accounts, and be sure every account you have is current and in good standing. If you can afford it, pay your credit card debt down a little (or a lot). Doing that can help you raise your score the very next month.

If you don’t have a lot of time to improve your score and you need a car now, you can try these strategies:

  • Compare offers. Check with lenders who will do a soft credit check (which doesn’t hurt your score) to tell you what terms you might qualify for.

  • Finance through the car dealer. They might have more flexible approval guidelines than your bank since they do have an incentive to help you leave in a car.

  • Apply with a qualified co-applicant.

  • Increase your down payment.

  • Borrow less by choosing a car with a lower price tag.

  • Ask the lender if you can get an interest rate discount for setting up automatic payments.

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