Can You Use a Personal Loan To Buy a Car?
Written by
Dawn Allcot
Edited by
Melanie Grafil
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When it’s time to buy a car, most people automatically think of auto loans. But personal loans are another option worth considering, as they can be used to purchase a vehicle.
While both can help you drive away in a new — or new-to-you — vehicle, they work quite differently. Your choice could impact your monthly payment, total interest paid and even what happens if you can’t make payments.
For both, terms depend on the lender’s requirements and the borrower’s credit history and current financial situation.
Personal Loan vs. Auto Loan — What’s the Difference?
While both allow you to receive funding upfront, these are the key differences:
- Auto loans require that you use the car as collateral, while personal loans may be unsecured.
- Auto loans typically have lower interest rates than personal loans.
- Both consider credit score and income, but auto loan approvals also consider the car’s value.
| Feature | Personal Loan | Auto Loan |
|---|---|---|
| Collateral | Unsecured: Your personal creditworthiness is the only backing. The lender cannot repossess your car if you default on the loan. | Secured: The vehicle itself is the collateral. The lender can repossess the car if you fail to make payments. |
| Interest rates | Typically higher: Rates are higher because the lender takes on more risk without having collateral to secure the loan. | Typically lower: Rates are lower because the car as collateral reduces the lender’s financial risk. |
| Loan usage | Flexible: Funds can be used for the car’s price plus extra costs like taxes, registration, and even immediate repairs. | Restricted: Funds can only be used for the purchase price of the specific vehicle being financed. |
| Vehicle restrictions | None: You can buy any car, regardless of its age, mileage, or condition, from any seller — private or dealer. | Strict: Lenders often have rules on the vehicle’s age, mileage, and condition, and may not finance private sales. |
| Ownership | Immediate: You are the sole owner from day one. The car’s title is issued in your name with no lienholder listed. | Delayed: The lender holds the title — or has a lien on it — and is the legal owner until the loan’s fully paid off. |
Scenarios Where a Personal Loan Is the Smart Choice
Not everyone should use a personal loan for a car purchase, but in some situations, it might be your best option:
Buying From a Private Seller
When you’re buying a car from a private seller, traditional auto financing may not be available. Even if it is, the personal loan may have a lower interest rate. With money available in your account through a personal loan as quickly as the same business day, you can make sure you get the car you want.
You’re Buying an Older, Classic, or High-Mileage Car
Banks and other lenders rarely finance older, classic, or even high-mileage, late-model cars through a traditional auto loan. Some lenders offer classic car loans, but you may be able to secure a better rate with a personal loan. Often, if a car has more than 125,000 miles or is more than 10 years old, a bank won’t finance it through a traditional car loan, according to SoFi.com.
You Want To Own the Title Immediately
When you take out an auto loan, you’re putting your vehicle at risk. If you can’t make the loan payments, your lender can repossess the vehicle. A personal loan allows you to own the title to the car immediately. There may be other reasons you want to own the title, too. For instance, if you purchase a vehicle at an auction and want to resell it for a profit, you’ll want to own the title right away.
You Need To Cover More Than Just the Car’s Price
If you’re buying a car but also want some extra cash in your pocket to cover other expenses, a personal loan allows you to borrow all the money you need and pay it back with one monthly payment. Apart from the convenience of a single payment, you won’t have two hard credit inquiries or new loans showing in your credit file in a short amount of time, which can help keep your credit score up.
When a Traditional Auto Loan Is a Better Deal
Many buyers will opt for a traditional auto loan. Here’s why:
- You’re buying a newer car from a dealership: Dealers make it easy to secure financing on the spot, called a “sign-and-drive” deal. These offers are typically available on newer cars.
- Your primary goal is securing the lowest possible interest rate: If you’re looking for the lowest interest rate, you’ll often find it with an auto loan through the dealer if they have a promotional offer going on. You can also get low rates on auto loans from banks and credit unions.
How To Get a Personal Loan for a Car Purchase
If you’ve decided a personal loan is right for your car purchase, here’s how to get one:
- Check your credit score: Higher scores qualify for better rates. Before applying, review your credit report and address any errors.
- Calculate your total loan cost: Add the car’s price, plus sales tax, dealer fees, title transfer and registration fees. Deduct the down payment you are able to make. That’s the total loan cost.
- Compare lenders: Get quotes from at least three sources, including your local credit union, which often has the lowest rates, your bank and an online lender. Look for lenders that do a soft credit pull for prequalification. Make sure to compare any loan origination fees and prepayment penalties.
- Get preapproved: Submit an application for preapproval to find out how much you can borrow and see your interest rates without impacting your credit score.
- Receive funds and purchase the car: When you find the best lender with the lowest rate, submit your application for approval. Money will be deposited directly into your account, allowing you to pay the seller like a cash buyer.
Whatever option you choose, make sure the monthly payment fits comfortably in your budget. A good rule of thumb is to keep all your car expenses–including payment, insurance, gas and maintenance — which should be under 10 to 15% of your monthly income.
Choosing Your Car Loan: When a Personal Loan Makes Sense
A personal loan often makes sense for borrowers who need more flexibility, while an auto loan typically offers a lower interest rate since it’s a secured loan.
If you choose a personal loan, you’ll own the title to the vehicle immediately, and you may be able to avoid purchasing full collision coverage or gap insurance coverage — although you’ll be taking the risk of losing your investment if your car is totaled in an accident. You’ll still have to pay off the personal loan, while securing funds to buy a new vehicle.
Keep in Mind
You don’t just have to get an auto loan through the car dealership or seller. There are plenty of lenders online, and you can check your bank or local credit union, too.
Get prequalified and check rates for both an auto loan and personal loan and compare your options before you make your choice.
FAQ: Personal Loans for Cars
Still wondering if using a personal loan to purchase a car is the right choice for you? Here are some common questions and answers to help you decide.- Do personal loans have better interest rates than auto loans?
- Since auto loans are secured loans, backed by your vehicle as collateral, they often have lower interest rates than personal loans.
- What credit score do I need for a personal loan for a car?
- Lenders often look for a credit score of at least 661 to qualify a borrower for a personal loan, according to SoFi. You may be able to secure a personal loan with a lower credit score, but your interest rate may be higher than you'd like.
- Is it a good idea to pay off a car loan with a personal loan?
- Paying off a car loan with a personal loan can be a good idea if you also want to take out additional funds and prefer to have a single loan payment, or if your car is too old or too high mileage to refinance it with an auto loan. If you want to obtain the title to your car right away, buying out your auto loan with a personal loan is one way to do it. In general, though, a personal loan comes with higher interest rates than a secured auto loan.
Ana Gotter contributed to the reporting for this article.
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- Kelley Blue Book "Car Affordability Calculator"
- SoFi. 2025. "Financing a 10-Year-Old Car: What Are My Options?"
- Lantern by SoFi. 2024. "What Are My Financing Options for a Classic Car?"
