Financing Your Used Car Purchase: Can You Use a Personal Loan?
A conventional auto loan is the most popular way to finance a used car. However, there are some cases when an auto loan doesn’t work for a used car purchase, leaving the buyer having to fund the deal in a different way. In that case, is it possible to use a personal loan to finance a used car?
What is the difference between an auto loan and a personal loan?
An auto loan is a secured loan that’s specifically designed for the purchase of a new or used vehicle. The vehicle’s title is used as collateral should the buyer default on the loan. In that case, the vehicle can be repossessed by the lender if the monthly payments aren’t met.
A personal loan covers other large financial needs like medical expenses, wedding or vacation costs, or debt consolidation. However, it can also be used to cover a car purchase. However, since the vehicle’s title does not serve as collateral for the loan, the interest paid on a personal loan is typically higher. Additionally, the repayment time may be shorter.
When is it a good idea to obtain a personal loan on a used car?
There are some cases when a personal loan could make more sense than a conventional auto loan when purchasing a used car. For example, most lenders won’t finance a car over 10 years old or past a certain mileage mark. In that case, a personal loan could be a better route if the buyer doesn’t have the proper funds.
Additionally, if the buyer doesn’t have the necessary credit rating to qualify for an auto loan, a personal loan could be a better route. The editors at Bank Rate say buyers with a subprime credit score could have higher average auto loan interest rates, sometimes as high as 18%. However, the interest rate on a personal could be lower.
The benefits of using a personal loan for a used car purchase
One of the most notable benefits of using a personal loan for a used car purchase is that it’s an unsecured debt. Since the car is not used as collateral, it won’t be repossessed if the buyer fails to make the payments.
Also, shopping for a car with a conventional auto loan necessitates finding the car first and then getting the loan. With a personal loan, the buyer can obtain funding first, then shop for the car like a cash buyer. This works well when purchasing a car from a private party.
There is also no down payment needed when applying for a personal loan.
The downsides of using a personal loan to finance a car
Unfortunately, there are some downsides when using a personal loan to fund a car purchase. For instance, the approval requirements are typically stricter when applying for a personal loan. There’s also a shorter repayment time, typically two to three years, with a personal loan, unlike an auto loan term (3 to 5 years).
A personal loan could make more sense than a conventional auto loan
Ultimately, it is possible to purchase a used car with a personal loan. Sometimes, it can make more sense than opting for a traditional auto loan. However, this will depend on the borrower’s credit standing and the car’s age and mileage.
Before shopping for a personal loan, we recommend checking out this personal loan calculator with SoFi. This calculator will help you to see how much you can afford. If a used car loan is a better route for you, check out what kind of credit score is needed to get approved.