Can I use a personal loan to buy a used car?

Buying a car with a personal loan is less popular but has benefits.

Whether it’s to consolidate high-interest debt or help with large purchases, such as a car, a personal loan can be a convenient option. Personal loans are the fastest-growing type of consumer debt, according to Experian, with 11 percent of American consumers having a personal loan averaging $16,259.

Personal loans are just that -- loans for any type of personal use. These loans can come from a bank or other lending institution that lets you borrow a predetermined amount of money that you repay. Those monthly payments will go toward both the original balance and the interest you’re being charged for the personal loan.

Getting a personal loan requires doing some research. You may have seen those offers via mail or email inbox luring you with offers of an easy application process, great rates and terms. Carefully compare rates to make sure you’re getting the loan that’s best for you. Use a site like Credible to get prequalified for loans ranging from 1,000 to $100,000 in just two minutes. You can compare rates side-by-side with zero impact on your credit score.


So you’ve got your eye on a new or used car you want to purchase. Getting a traditional auto loan from the car dealer isn’t the only way to finance the car. In fact, it may even make more sense to get a personal loan, depending on your situation. While this is less common, with only about 4 percent of car buyers using a personal loan for their purchase, it can be a viable option.

The first step to getting a personal loan is filling out an application to get the qualification process started. The lender will closely review your income, employment history and credit score to determine whether you will get a loan and at what rate. The lower the interest rate the less you’ll have to repay in the long run.

Some tips on getting the best interest rate include:

Shopping around to know what rates are available

Checking with the lending institution you already have a relationship with

Improving your credit score

Using collateral

Selecting a shorter repayment period

Most people don’t enjoy the haggling in the finance department that comes along with financing a car directly from the dealer. Walking into the showroom already knowing you have the funds to pay for the car through a personal loan can make the process much easier and gives you a little more power when it comes to working out the price of the car.

Whether you select an auto loan or personal loan, sticking to your budget is key. To help determine your approximate repayments costs try using an online personal loan calculator for peace of mind and use Credible to see what rates you qualify for.


Auto loan vs. personal loan

One of the primary features that make personal loans different from car loans is that personal loans are unsecured. While your car can be repossessed if you don’t repay an auto loan as agreed, there’s no asset connected with a personal loan. However, because an unsecured loan is risky, personal loans often have higher interest rates.

An auto loan has restrictions as to the type and age of car you’re purchasing. A personal loan has no restrictions as to what you can use the funds to buy. Also, you can buy the car with a personal loan and if there are funds leftover you’re free to spend it any way you want. 


Unlike auto loans, prepayment penalties and fees are often associated with personal loans.

When taking out a personal loan for a vehicle purchase makes financial sense

If you’re buying a car directly from an owner and not the dealer, a personal loan is likely the only way to go. Without the help of a finance department on-site, you have to come up with the money for the vehicle yourself.

You want ownership of your car immediately. With a personal loan you own the car outright without having to wait until the final payment is made as with auto loans.


There’s no restriction on a personal loan if you want to buy a much older car. With some car loans, you can only buy a used car if it’s under a certain age. This usually rules out the classic car enthusiasts looking for a 1969 Pontiac GTO.

You want a more affordable insurance policy. With personal loans, you’re not required to carry full coverage and can shop around for a less expensive policy.

Why a personal loan may not be the way to go for this kind of purchase

If you want the most competitive rates for your car purchase, an auto loan may be the way to go. Their rates are often more competitive because it’s a secured loan.

Credit plays an even larger role for an unsecured personal loan. It can be more challenging to qualify for a personal loan if you have a lot of blemishes on your credit. If you do get the loan with credit blemishes, you will likely wind up paying a much higher interest rate.