Can Personal Loans Finance Your Next Vehicle Purchase?

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Nov 11, 2024

Can Personal Loans Finance Your Next Vehicle Purchase?

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Absolutely, you can! Think of it like taking the scenic route on a road trip — it’ll get you there, but it may not be the most direct or cost-efficient option. Still, it’s a good option if you have a non-standard situation.

Personal loans can be used for all sorts of things, including buying a car. However, there’s a catch — personal loan interest rates are often higher than those of standard auto loans.

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From car prices to loan rates

Buying a new car is exciting, but what about prices? Since we can all spot inflation and rising prices of everything, let's look at the situation with cars.

In Q2 of 2024, the average price of a new vehicle reached $47,400, while used cars were around $26,000. New loan amounts in the United States are slightly higher year after year. What about those pesky interest rates? They climbed from under 4% in early 2022 to 7.9% for new cars, as reported by Statista. But finally, they started to dip. Fingers crossed that trend continues.

In most cases, a traditional auto loan is the trusty highway you want to take. It’s smooth, straightforward, and built explicitly for car buying.

Personal loans? More like the winding backroads — still fun, but maybe not the quickest or cheapest way to get you behind the wheel. That said, there are cases where a personal loan fits the journey.

Getting familiar with personal loans

Borrowers can use personal loans for nearly any reason, including debt repayment, medical bills, family vacations, home improvements, and virtually any other payment requirement you may think of.

Personal loans are often preferred over credit cards for major purchases due to lower interest rates, while they are rarely utilized for car purchases.

A personal loan is like a handshake agreement based on trust — it’s granted to you purely based on your creditworthiness without needing to put up any collateral. Overall, it's always good to improve your credit score before applying, no matter what for. Since a personal loan is not secured, the lender depends on your credit history and financial situation to determine your ability to repay.

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Personal loans vs auto loans: what are the key differences?

As we mentioned, you don’t need to put up any collateral with personal loans, but that means the interest rates can be a bit higher. Second, you can use that loan for any car you fancy — even a vintage gem! This way, it’s easy to buy directly from private car owners. Guess what? No down payment is necessary.

Auto loans, however, are a bit more structured. They’re secured by the car itself, which typically gives you lower interest rates, but it also means there’s a risk of losing your car if you miss payments. You usually have to make a down payment and can only buy newer models, keeping things nice and straightforward.

When does it make sense to buy a car using a personal loan?

Here are three examples of when a personal loan might be the right move for buying a car:

Standard financing isn’t available for your car. If you’re dreaming of a classic car that’s over ten years old, you might run into a problem with traditional auto loans. Many lenders won’t finance vehicles of this age or those with high mileage. In this case, a personal loan can be your ticket to that charming ride.
Your credit score is holding you back. A personal loan is usually more flexible than an auto loan because it can be used for anything, not just a car. Plus, it often has less requirements, so even if your credit isn’t perfect, you might still qualify. You also get more options for repayment terms and longer repayment periods. Making it easier to find a plan that works for you.
The personal loan rate can be better than the auto loan rate. When it comes to personal loans, those interest rates can sometimes outshine standard auto loans — especially if your credit score is looking decent. The average personal loan interest rates range from 9% to 35%. If your credit score is impressive, you might score lower rates, like 7%. But if it’s far from impressive, then expect rates of 30% or more!

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How to get a personal loan for your next car

As you get closer to buying your new car, here’s a list of all steps to help you navigate the selection and purchase process:

Set your budget

Think of it like packing for a road trip — you must know what to bring. Start by figuring out how much you can afford each month without veering off course.

Choose your loan type

While dealer financing may seem convenient and fast, it’s wise to explore other options. Dealer loans often come with hidden fees and may require large balloon payments at the end of the term. So, consider the following common types of personal loans:

A secured personal loan offers you lower interest rates since your car acts as collateral. But don’t forget the lender will need to take a good look at your car to ensure it meets their standards before giving you the green light.
A fixed-rate personal loan is smooth sailing ahead, but your interest rate stays locked in for the entire term, which means no surprises. You can count on stable payments each month, making budgeting a breeze.
A variable-rate personal loan allows for extra repayments and the flexibility to access available funds through redraw options, which can help you pay off the loan faster.

Check your credit score

A good credit score can secure better loan terms. If your score isn’t ideal, consider improving it by paying down existing debts, spending less on your credit cards, and paying everything on time.

Research lenders

Explore various lenders even beyond traditional banks, including credit unions and online platforms. They may offer personal loans for used cars. Compare their interest rates and terms. Also, read the customer reviews, as they are a great source of information about the experiences of other users.

Gather documentation and apply

Before you hit that "apply" button, make sure you have your documents ready — proof of identity, income, and any existing debts. Once everything's in order, you can submit your application online or in person.

Review and accept the loan

So now you have already researched several companies and made a shortlist. Your offers have arrived, but don't rush to sign yet. Take a little more time at the end to check each offer to make sure they are the perfect fit for you.

If you follow these steps carefully, you will be on your way to new wheels in no time. Good luck!

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