Can you use a personal loan to buy a car?
Often, yes. You can typically use a personal loan for almost anything, from debt consolidation to funding a major purchase, like a car. That said, each lender may have its own restrictions on the use of funds. If you're considering using a personal loan to pay for a vehicle, you should verify with your lender that you can use the funds in that way.
Personal loan vs. auto loan
If you're considering using a personal loan to buy a car, you should understand the key differences between personal loans and auto loans:
- Secured vs. unsecured: An auto loan is typically secured by the car you're buying, which acts as collateral. If you default on the loan, the lender can repossess the vehicle. A personal loan is often unsecured, which means no collateral is required.
- Annual percentage rate (APR): APR is the yearly cost of a loan, including interest and fees. Because the car serves as collateral for an auto loan and lowers a lender's risk, auto loans tend to come with lower APRs compared to personal loans. This can make auto loans more affordable in the long term.
- Loan terms: Repayment terms are similar for most personal and auto loans. For example, Citi offers personal loan repayment terms of up to 5 years. Auto loan terms generally range from 3 to 7 years.
- Amount borrowed: The amount you can borrow with an auto loan is usually tied to the value of the car. With personal loans, however, maximum loan amounts can depend on the lender and your credit score, which may mean you could borrow more than the amount of the car and have funds to use for something else.
- Down payment: You can make a down payment on an auto loan to reduce the amount borrowed (and in some cases, a down payment may even be required). With a personal loan, you can simply borrow the full cost of the car, if you’re approved for that amount, or use a combination of savings and a loan to pay for the car.
Should you use a personal loan to buy a car?
There are certain situations when using a personal loan, rather than an auto loan, might make sense:
You can't access an auto loan
If you’re buying a car from a private seller rather than a dealership that offers financing, an auto loan may simply not be available. And some dealers won’t offer financing for older cars or cars with higher mileage. In these cases, a personal loan can provide the financing you need.
You qualify for a lower rate with a personal loan
In rare cases, you may be able to secure a lower interest rate with a personal loan than with an auto loan. This may be the case if you have excellent credit and find a lender offering competitive rates.
You don’t want to make a down payment
Auto loans sometimes require a down payment, but personal loans don’t. If you’d prefer to finance the entire purchase without putting money down, a personal loan could be a good option.
You don’t want to use your car as collateral
While auto loans use your vehicle as collateral, personal loans can be unsecured. That means you wouldn’t have to worry about the car being repossessed if you aren’t able to repay the loan. Just keep in mind that there are still important consequences for falling behind on personal loan payments, which may include penalties, fees and a negative impact to your credit score.
You want more flexibility
While auto loans may only be used to finance the car, personal loans may be more flexible. If you want to use funds to pay for the vehicle as well as extra costs like maintenance, a personal loan may be the way to go. That way, you wouldn’t have to apply for multiple loans at once, which can negatively impact your credit score.
Drawbacks of using a personal loan to buy a car
There are a few drawbacks to using a personal loan to finance a car:
- Potentially higher interest rates: Personal loans typically come with higher interest rates than auto loans because they typically don’t require collateral. Depending on the term, it could cost more to borrow the same amount.
- Shorter terms: Since personal loans can have shorter repayment periods than auto loans, your monthly payments may be higher compared to an auto loan.
Deciding whether financing a car with a personal loan is right for you
In most cases, using an auto loan to finance makes the most sense. This is because auto loans tend to offer lower interest rates, longer repayment terms and the ability to borrow based on the car’s value. However, a personal loan might make sense in specific circumstances, such as if you’re buying from a private seller, you don’t want to make a down payment or you qualify for a better rate.
If you’re interested in taking out a personal loan to fund your car purchase, Citi® Personal Loans — which offer flexible terms — may help. If you think you could benefit from an unsecured Citi Personal Loan, you can pre-qualify with no impact to your credit score or apply online today.
This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
