Buying a car is often a major purchase, whether you opt for new ($48,000 on average) or used (typically about $26,000). If you’re in the market, you may well be exploring your financing options, which could include a loan. In fact, you may be deciding between a car loan and a personal loan.
If that’s your situation, it’s worth taking a closer look at your options and the pros and cons of each. Here, you’ll learn more about this topic, so you can make the best decision for your situation and needs.
Table of Contents
Key Points
• Personal loans offer flexibility in funding, allowing for the purchase of a car and covering other related expenses.
• Secured personal loans do not require collateral, unlike auto loans that use the car as security.
• Interest rates for personal loans may be higher due to their unsecured nature.
• Personal loans can be either secured or unsecured, with fixed or variable interest rates.
• Approval for a personal loan before car shopping can empower buyers to negotiate effectively at dealerships.
Types of Loans That Can Be Used to Buy a Car
Can you use a personal loan to buy a car? Yes. But is it the right option? There are a few things to take into consideration when thinking about buying a car with a personal loan or a car loan.
• Are you buying a new car or a used car?
• Are you buying a car from a private individual or a dealership?
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars. While SoFi does not offer auto loans at this time, we do offer personal loan options with other use cases.
Are You Buying a New or a Used Car?
If you’re buying a new car from a dealership, the benefits of using dealer financing might outweigh the drawbacks. Automakers offer financing on cars purchased through their dealerships, with low or sometimes even 0% annual percentage rates (APRs) for well-qualified buyers in an effort to compete with banks and other financial institutions.
Is the Seller an Individual or a Car Dealer?
An individual who is selling a used car is not likely to offer financing, so a car buyer in that situation would likely need to find their own source of funds. As the name implies, a personal loan can be taken out for a variety of personal expenses — including to pay for a car. In this way, personal loans to buy a car can work well if you’re shopping from friends, neighbors, or other individuals.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars. While SoFi does not offer auto loans at this time, we do offer personal loan options with other use cases.
Getting a Personal Loan for a Car
Funds from a personal loan can be more flexible than funds from an auto loan — they can be used not just for purchasing a car but for the other costs of owning a car as well.
Personal loans can be secured or unsecured, with either fixed or variable interest rates. If you choose to purchase a car with an unsecured personal loan, collateral is not needed. There is no asset for a lender to seize in the case of default, as with a secured personal loan, although lenders can pursue you in court.
Car buyers who have a personal loan approval in hand before they go to the dealership can negotiate, knowing exactly how much they can spend. If you don’t think your income would qualify you for an auto loan from a dealership, you could consider looking for personal loans based on income.
Refinancing a car loan with a personal loan might be an option in some cases. Perhaps your credit score was bad when you purchased your car, but you’ve built it since taking out your car loan and you can now qualify for a lower interest rate. Or you’d rather have a shorter-term loan than you currently have, and refinancing with a personal loan might accomplish that.
Recommended: How Does Collateral Work with a Personal Loan?
Determining the Value of a Car
Whether the car you’re considering is new or just new to you, there are a number of well-respected pricing guides to consult for an appropriate price range once you narrow down your car choices. Having an idea of the car you’re considering buying may give you more confidence while negotiating a price.
• Edmunds offers a True Market Value guide.
• Kelley Blue Book has suggested price ranges for various cars (particularly useful for used cars).
• J.D. Power offers information about new and used cars, including classic cars.
• Consumer Reports provides detailed reviews and reports about specific makes and models.
These resources simply provide a price range for the car you want. Calling car dealers for price quotes or estimates and looking for any purchase incentives or dealer financing offers are good ways to be prepared as you consider your financing options.
Discover real-time vehicle values with Auto Tracker.¹
Now you can instantly monitor vehicle prices in this unprecedented market—to help you make smart money moves.
Pros and Cons of Using a Personal Loan for a Car
Once you know which car you want and what you can afford, how do you pay for it? If you’re considering different ways to get a car loan — and a personal loan is one option — there are some pros and cons to weigh. Here, details that can help when you know that you can use a personal loan to buy a car but wonder if it’s the right move.
| Pros of Using a Personal Loan for a Car | Cons of Using a Personal Loan for a Car |
|---|---|
| Prequalification for a personal loan means you know exactly how much you can spend. | Capping your spending at the amount of your personal loan will limit the pool of cars you can afford. |
| You don’t need a downpayment. | Interest rate may be higher than for an auto loan. |
| Funds can be used for other expenses, not just the car purchase. | May be more difficult to qualify for than an auto loan. |
💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.
Pros and Cons of Using an Auto Loan To Buy a Car
In essence, a car loan works much like a mortgage. It’s a secured loan paid for in monthly installments, and the asset isn’t fully yours until the final payment is made. The car is the asset that secures the loan, which means if you default on payments, the lender could seize your car. The car’s title typically remains with the lender until the loan is paid in full.
| Pros of Using an Auto Loan To Buy a Car | Cons of Using an Auto Loan To Buy a Car |
|---|---|
| May be easier to qualify because it’s a secured loan. | If you default on the loan, the lender can repossess your car. |
| Auto loans are structured specifically for vehicle purchases. | Lenders may restrict purchase to a newer car. |
| May be easier to qualify for an auto loan than a personal loan. | May need a good or excellent credit score to qualify for favorable interest rates. |
Things to Consider When Using a Personal Loan to Buy a Car
After comparing the general factors of using a personal loan vs. using an auto loan to buy a car, you might want to look at some more specific things. “Can you get a personal loan for a car?” is a question that can be answered differently depending on your financial situation and other factors. Learn more about the ins and outs of personal loans for cars here.
Credit Score
Since a personal loan for a car is an unsecured loan, you typically need a higher credit score to qualify for a favorable interest rate. Unsecured loans are generally riskier for lenders than secured loans because there is no collateral to back the loan.
Bank Account
Having a bank account may make it easier to get a personal loan. Lenders tend to see a bank account as evidence that an applicant has sufficient cash flow to make payments. Getting a personal loan with no bank account may mean having a higher interest rate or less favorable terms — or both.
Interest Rate
Generally speaking, personal loan applicants who are approved for lower interest rates have higher credit scores. Personal loan interest rates tend to be higher than auto loan interest rates because there is no collateral to secure the loan.
Other Fees
Personal loan fees that potentially can be charged are usually higher than auto loan fees. Origination fees are one example — they’re commonly included in personal loans and can range from 1% to 10% of the loan amount. Some auto loans may include an origination fee, but the range is typically lower than the personal loan range, at 1% to 2% of the loan amount.
Loan Term
The term of a loan is the length of time the lender allows for repayment of the loan. Personal loan terms tend to be shorter than auto loan terms. One reason for this is due to the unsecured nature of a personal loan. If a lender doesn’t have an asset to secure a loan, they may want to make sure they get their money back as soon as possible. Personal loan terms typically range from two to seven years.
Collateral
Personal loans are usually unsecured, which means no collateral is required. As mentioned before, however, that tends to equate to higher interest rates and shorter terms than secured loans offer. Collateral gives a lender more confidence that the borrower is serious about repaying the loan.
Ease of Application and Approval
Online applications for personal loans are fairly common. Completing an online application is usually quick and easy, especially at the pre-qualification stage. After that, a lender will likely ask for more detailed information to move forward in the process.
At this point, the lender will likely run a hard credit check on your credit report, which will affect your credit score (in contrast to a soft credit check, which doesn’t affect your credit score). You may be asked what the purpose of the loan is, and you’ll need to fill out a complete loan application. Lenders will also ask you to provide proof of identity, Social Security number, and current address, and will verify your employer and income.
Down Payment
Typically, a down payment is not required when using a personal loan to purchase a car. This factor can be the deciding one for some people looking for auto financing. If you’re getting a personal loan for part of the cost of the car and paying for the remainder with your own funds, you could think of the latter as your unofficial down payment.
The Takeaway
Choosing what type of loan — auto loan or personal loan — generally corresponds to what type of car you’re buying, what interest rate and terms you might qualify for, and what works best for your specific financial situation. Getting prequalified for a personal loan before you begin shopping for a car may help direct your car search toward vehicles that are affordable and fit your lifestyle.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.
SOPL1023026