SoFi

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.

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.

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.

💡 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.

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

If you’re getting a mortgage, one important consideration is the APR, or annual percentage rate, on your loan. This is something different from your interest rate: The home loan APR reveals the overall cost of your mortgage, reflecting both the interest rate and any additional costs that must be factored in.

Knowing the APR on a home loan is a key bit of intel which can influence your overall costs as you move towards homeownership. To help you better understand this concept and how APR is calculated, read on. You’ll likely be better prepared to know which loan offer best suits your needs, today and tomorrow.

What Is APR?

APR stands for annual percentage rate, and it’s used to measure the cost of borrowing money from lenders for various reasons, such as your mortgage loan. While it’s often presented at the same time as your interest rate, it isn’t the same thing.

APR is expressed as a percentage and takes into account not only the interest rate but also many of the costs that are associated with the loan. When it comes to borrowing a mortgage, these costs can include such items as these, among others:

•   Origination fees

•   Application fees

•   Processing fees

•   Discount points.

APR provides a more comprehensive picture of the total cost of the mortgage loan. It gives you an overall view of the fees and costs you would have to pay that are included in the finance charge. If you compare just the interest rate, the additional fees and costs aren’t represented, which could give you an incomplete picture when it comes to determining the actual cost of the loan. That could negatively impact your ability to budget accurately for your home loan costs.

Since not all lenders charge the same fees or interest rates, comparing APRs is usually a better way to compare the total cost of your loan from one lender to another.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

Why Is APR Important When Taking Out a Mortgage?

Knowing the APR can help consumers be more informed while comparison shopping for loan products. Thanks to the Truth in Lending Act, lenders are required to disclose the APR of their loans, as well as all fees and charges associated with a loan.

The APR should include all finance charge fees, which can make it easier for borrowers to sort through loan comparisons to find the right mortgage.

How Are Interest Rates Calculated?

As we’ve discussed, APR and interest rate aren’t the same, but your interest rate does impact your APR. So, how exactly are interest rates calculated?

Your interest rate is a percentage of your mortgage rate. What that percentage will be depends on what type of mortgage loan you have.

•   With a fixed-rate mortgage, you’ll pay the same interest rate for the entire time you have the loan.

•   With an adjustable rate mortgage, on the other hand, your rate will fluctuate throughout the life of the loan.
Also, keep in mind that any unpaid interest gets added to the mortgage principal. This means you’ll have to pay interest on that interest.

Your lender will determine your specific interest rate based on your financial specifics, such as your credit score, as well as the current economic conditions and market interest rates. Lenders usually use their own unique formula to calculate interest rates, which is why your rate can vary from lender to lender — and why it’s important to shop around for rates.

Recommended: APR vs. Interest Rate: What’s The Difference?

How to Calculate Your APR

When you’re getting a mortgage, you may want to be extra thorough and calculate the APR yourself. There’s a way to make that happen. But be warned, it’s not necessarily a super fun math project, but hey, where there’s a formula, there’s a way, right?

•   To get started, you’ll have to know the approximate monthly Principal and Interest (P&I) payment on your loan. Maybe your lender has already told you what it would be, but if not, you could calculate it with an online mortgage calculator or by hand.

•   You’ll need to have a loan amount, interest rate and a term in years.

•   Once you have the monthly P&I payment calculated, you’ll then be able to calculate the APR, which you can do with an online calculator. Keep in mind that because you don’t know what your applicable APR loan fees will be, it can be wise to use a ballpark estimate. If the loan costs that will impact your APR are 2% of your loan amount and your loan amount is $200,000, your loan costs for calculating the APR will be $4,000.

💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Why You Need to be Careful When Using APR to Compare Mortgages

When you’re getting a mortgage, you will likely have the APRs for all the mortgage offers you’re considering. Your APR is important to consider because it factors in the expense of additional fees over the life of your mortgage. If you’re applying for a 30-year mortgage, those fees are spread over 30 years.

But do you plan to live in your home for the full 30 years of your mortgage and never refinance your mortgage? If you sell your home after five years, rather than staying for the duration of your 30-year loan, you’ll still have to pay for the loan fees (such as origination fees).

That’s why it’s important to consider and compare APRs when choosing a mortgage. If you plan on living in the home for a limited time, a lender that offers fewer fees might be a better choice than a lender with a low APR but lots of fees. You may want to consult with your financial advisor before making this decision.

When you’re mortgage shopping, especially if you are a first-time homebuyer, you also may want to proceed with caution when comparing the APRs of fixed-rate and adjustable-rate mortgages if you are using an online calculator. The APR on adjustable-rate loans may not be an accurate representation of the cost of the loan since some calculators cannot anticipate the frequency or amounts of the interest rate changes.

Recommended: Tips When Shopping for a Mortgage

The Takeaway

When getting a home loan, your interest rate and APR, or annual percentage rate, are not the same thing. The APR can reflect the overall cost of the loan, including various fees, for instance.

If you’re ready to take the next step in your home-buying journey, the first step is taking stock of your mortgage options. Comparing each loan’s APR is a quick and easy way to see how your offers stack up although it isn’t the only factor to take into account.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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.

SOHL1023241

A pre-IPO placement involves the sale of unregistered shares in a company before they’re listed on a stock exchange for the first time. A pre-IPO placement usually occurs immediately before a company goes public.

Companies typically sell pre-IPO shares to hedge funds, private equity firms and other institutional investors that can purchase them in large quantities. It’s possible, however, to get involved in pre-IPO investing as an individual retail investor.

Investing in IPOs or pre-IPO stock could be profitable, if the company’s public offering lives up to or exceeds market expectations. But it’s also risky, since you never know how a stock will perform in the future.

How Does Pre-IPO Placement Work?

An IPO, or initial public offering, is an opportunity for private companies to introduce their stock to the market for the first time. A typical IPO requires a lengthy process, as there are numerous regulatory guidelines that companies must meet.

Once those hurdles are cleared, however, the company will have a date on which it goes public. Investors can then purchase shares of the company through the stock exchange where it lists.

Pre-IPO investing works a little differently. The end goal is still to have the company go public. But before that, the company sells blocks of shares privately, based on its IPO valuation. A successful pre-IPO gives the company attention, as well as capital from investors ahead of the actual IPO date.

For the most part, pre-IPO shares are restricted to high-net-worth investors, or accredited investors, i.e. those who can afford to invest large amounts of capital, and can afford to take on a certain amount of risk. A pre-IPO placement of shares could be made without a prospectus or even a guarantee that the IPO will occur.

Individual investors typically don’t have the funds required, or the stomach for that level of risk.

In return for that measure of uncertainty Pre-IPO investors get in on the ground floor and purchase shares before they’re available to the market at large. There may also be an added incentive. Because they’re buying such large blocks of shares, pre-IPO investors may get access to them for less than the projected IPO price.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

An Example of Pre-IPO Placement

Pre-IPO placements have gained popularity over the last decade, with more companies opting to offer them ahead of going public. Some of the companies that have offered pre-IPO stock include Uber and Alibaba, both of which have ties to e-commerce.

Alibaba’s pre-IPO offering was notable due to the fact that a single investor and portfolio manager purchased a large block of shares. The investor, Ozi Amanat, purchased $35 million worth of pre-IPO stock at a price that was below $60 per share.

He then distributed those shares among a select group of families. By the end of the first public trading day, Alibaba’s shares had risen to $90 each. Alibaba’s IPO delivered a 48% return to those pre-IPO shareholders due to higher-than-expected demand for the company’s stock.

In Uber’s case, PayPal agreed to purchase $500 million worth of the company’s common stock ahead of its IPO. PayPal then lost a large portion of its investment when the Uber stock price fell by about 30% following its IPO.

Pros and Cons of Pre-IPO Placement

There are benefits to pre-IPOs placements, but there are also some important drawbacks that investors should understand.

Pros of Pre-IPO Placement

From the perspective of the company, pre-IPO offerings can be advantageous if they help the company to raise much-needed capital ahead of the IPO. Offering private placements of shares before going public can help attract interest to the IPO itself, which could help make it more successful.

For investors, the benefits include:

•   Access to shares of a company before the public.

•   The potential ability to purchase shares of pre-IPO stock at a discount. So if a company’s IPO price is expected to be $30 a share, pre-IPO investors may be able to purchase it for $25 instead. This already gives them an edge over investors who may be purchasing shares the day the IPO launches.

•   Purchasing shares at a discount can potentially translate to higher returns overall if the IPO meets or exceeds initial expectations. The higher the company’s stock price rises following the IPO, the more profits you could pocket by selling those shares later.

Recommended: How to Find Upcoming IPO Stocks Before Listing Day

Cons of Pre-IPO Placement

While pre-IPO investing could be lucrative, there are some potential backs to consider. Specifically, there are certain risks involved that could make it a less attractive option for investors.

•   The company’s IPO may not meet the expectations that have been set for it. That doesn’t mean a company won’t be successful later. Facebook, for example, is noteworthy for having an IPO described as a “belly flop”. A disappointing showing on the day a company goes public for the first time could shake investor confidence in the stock and bode ill for its future performance. That in turn could affect the returns realized from an investment in pre-IPO stock.

•   The company may never follow through on its IPO and fails to go public. In that case, investors may be left wondering what to do with the shares they hold through a pre-IPO private placement. WeWork is an example of this in action. In 2019, the workspace-sharing company announced that it had scrapped its plans for an IPO, thanks to limited interest from investors and concerns over the sustainability of its business model. In 2021, the company did go public — but not through an Initial Public Offering. Instead, WeWork went public through a merger with a special acquisition company or SPAC.

•   Pre-IPOs are less regulated than regular IPOs.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Summary of Pros and Cons of Pre-IPO Placement

Here’s a quick look at the benefits and drawbacks of pre-IPO placements:

How to Buy Pre-IPO Stock

Typically, only accredited investors can purchase pre-IPO placements. As of 2021, the Securities and Exchange Commission defines an accredited investor as anyone who:

•   Earned income over $200,000 (or $300,000 if married) in each of the prior two years and reasonably expects to earn that same amount in the current year, OR

•   Has a net worth over $1 million, either by themselves or with a spouse, excluding the value of their primary residence, OR

•   Holds a Series 7, 65 or 82 license in good standing

If you meet these conditions for accredited investor status, then you may be able to purchase shares of pre-IPO stock through your brokerage account. Your brokerage will have to offer this service and not all of them do.

Other options for buying pre-IPO stock include purchasing it from the company directly. To do that, you may need to have a larger amount of capital at the ready. So if you’re not already an angel investor or venture capitalist, this option might be off the table.

You could also pursue pre-IPO placements indirectly by investing in companies that routinely purchase pre-IPO shares. For example, you might invest in a mutual fund or exchange-traded fund that specializes in private equity or late-stage companies preparing to go public. You won’t get the direct benefits of owning pre-IPO stock but you can still get exposure to them in your portfolio this way.

The Takeaway

For some high-net-worth or institutional investors, buying pre-IPO shares — a private sale of shares before a company’s initial public offering — might be possible. But it’s highly risky. For the most part, individual investors won’t have access to these kinds of private deals. But eligible investors may be able to trade ordinary IPO shares through their brokerage.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Photo credit: iStock/filadendron

SoFi Invest®