Yes, you can use a personal loan to buy a car, but it usually costs more than a car loan
A personal loan is money you borrow for any purpose, with no restriction on how you spend it. You can use those funds to buy a car from a dealer, a private seller, or anywhere else. The lender does not care what you do with the money.
However, personal loans typically charge higher interest rates than auto loans because the lender has no claim on the car itself. With a car loan, the lender holds the title until you pay off the debt — if you stop paying, they repossess the vehicle. With a personal loan, the lender has no collateral, so they charge more to cover that risk. Over the life of the loan, this difference can add thousands of dollars to what you pay.
Whether a personal loan makes sense depends on your credit score, how much you need to borrow, and whether you have other options available.
Key Takeaways
- Personal loans for cars typically charge 2 to 10 percentage points higher interest rates than dedicated auto loans, depending on your credit score and the lender.
- You own the car when ready with a personal loan, whereas an auto loan lender holds the title until you pay off the debt.
- Personal loans are unsecured, meaning the lender cannot repossess the car if you miss payments, but they can pursue other collection actions.
- A personal loan makes the most sense if you have excellent credit, need to buy from a private seller who will not accept financing, or want to avoid a long-term auto loan commitment.
- If you have poor credit, a personal loan will cost significantly more than an auto loan, and you may find better rates by improving your credit score first or shopping for an auto loan instead.
How personal loan interest rates compare to auto loan rates
The interest rate you receive on a personal loan depends primarily on your credit score. Lenders view borrowers with scores above 740 as low-risk and offer rates between 6 and 12 percent. Borrowers with scores between 670 and 739 typically see rates between 12 and 20 percent. Below 670, rates often exceed 25 percent.
Auto loans follow a similar pattern but start lower at each tier. A borrower with a score above 740 might receive an auto loan rate between 3 and 6 percent. The same borrower with a personal loan might pay 8 to 12 percent. For someone with a score between 670 and 739, an auto loan might be 8 to 15 percent while a personal loan runs 15 to 25 percent.
On a $25,000 car loan over five years, the difference between a 6 percent auto loan and a 12 percent personal loan amounts to roughly $3,500 in additional interest. That gap widens for borrowers with lower credit scores.
When a personal loan makes sense for a car purchase
A personal loan becomes the practical choice in specific situations. If you are buying from a private seller, they typically cannot accept financing — they want cash. A personal loan lets you pay them in full and own the car when ready, without waiting for an auto loan to close.
Personal loans also work well if you want to avoid the long commitment of a traditional auto loan. Personal loans often run three to five years, while auto loans commonly stretch to six or seven years. If you plan to keep the car only a few years or expect your financial situation to improve soon, the shorter timeline may suit you better.
If you have excellent credit and can find a personal loan rate within 1 or 2 percentage points of an auto loan rate, the flexibility of a personal loan — no title held by the lender, no mileage restrictions, no prepayment penalties on most personal loans — may outweigh the slightly higher cost.
Ownership and repossession differences between loan types
With an auto loan, the lender holds the title to the car until you pay off the entire debt. You own the car in practice — you drive it, insure it, and maintain it — but the lender's name appears on the title. If you miss payments, the lender can repossess the car without going to court in most states.
With a personal loan, you own the car outright from day one. Your name is on the title when ready. The lender has no legal claim to the vehicle itself. If you miss payments, the lender cannot repossess the car. Instead, they can sue you, report the missed payments to credit bureaus, or send the debt to a collection agency.
This difference matters if you are worried about losing the car. A personal loan protects you from repossession. However, it also means the lender charges more interest because they have no way to recover their money if you default — they must pursue you through the courts.
Loan terms and payment flexibility
Personal loans typically offer fixed interest rates and fixed monthly payments over a set term. Most lenders offer terms between 24 and 84 months, though three to five years is common. Your payment stays the same every month, making budgeting straightforward.
Many personal loans allow you to pay off the debt early without penalty. This flexibility means if you receive a bonus, inheritance, or other windfall, you can put it toward the loan and save on interest. Some auto loans also allow early payoff without penalty, but others charge a prepayment fee, so you should ask before signing.
Personal loans are usually unsecured, meaning the lender does not require collateral beyond your promise to repay. Auto loans are secured by the car itself. This is why auto loans cost less — the lender can sell the car to recover their money if you default.
How to decide between a personal loan and an auto loan
Start by getting your credit score. You can obtain it free once per year from each of the three major credit bureaus through AnnualCreditReport.com. Knowing your score tells you what interest rates you might receive from each type of lender.
Next, shop for both a personal loan and an auto loan. Many banks, credit unions, and online lenders offer personal loans. For auto loans, contact your bank or credit union first — they often offer better rates than dealership financing. Get rate quotes from at least three lenders for each type. The quotes should show the interest rate, monthly payment, and total interest you will pay over the life of the loan.
Compare the total cost, not just the monthly payment. A personal loan with a lower monthly payment might cost more overall if the term is longer. Calculate what you will actually pay in interest by multiplying the monthly payment by the number of months, then subtracting the loan amount.
If you are buying from a private seller, an auto loan may not be an option — most auto lenders require the car to be inspected and titled in your name before they fund the loan. In that case, a personal loan is your primary choice.
Risks and drawbacks of using a personal loan for a car
The main drawback is cost. Over the life of the loan, you will likely pay more in interest with a personal loan than with an auto loan. For borrowers with lower credit scores, this difference can be substantial.
Personal loans also typically have shorter terms than auto loans. A five-year personal loan means a higher monthly payment than a seven-year auto loan for the same amount borrowed. If your budget is tight, the monthly payment might strain your finances.
If you default on a personal loan, the lender cannot repossess the car, but they can pursue other collection actions. They may sue you, garnish your wages, or place a lien on your bank account. Your credit score will suffer either way — missed payments on personal loans damage your credit just as much as missed payments on auto loans.
Finally, if you need to refinance later — perhaps because interest rates drop or your credit improves — refinancing a personal loan is often harder than refinancing an auto loan. Fewer lenders offer personal loan refinancing, and the process is less standardized.
Frequently Asked Questions
Can I get a personal loan if I have bad credit?
Yes, but the interest rate will be high — often 25 percent or more. Some online lenders specialize in bad-credit personal loans, but you will pay significantly more in interest than someone with good credit. If possible, waiting a few months to improve your credit score before borrowing can save you thousands of dollars.
What if I want to buy a car from a dealership using a personal loan?
You can do this, but most dealerships prefer to arrange financing themselves because they earn a commission. Some dealerships will accept a personal loan as payment, but you should bring proof that the funds are available. Bring a bank statement or a loan approval letter showing the amount.
Can I use a personal loan to pay off an existing auto loan?
Yes, this is called refinancing. If interest rates have dropped or your credit score has improved, refinancing an auto loan with a personal loan might lower your monthly payment or total interest. However, you will need to pay off the auto loan in full first, which means the lender releases the title to you before the personal loan funds arrive.
Do I need full coverage insurance on a car bought with a personal loan?
If you own the car outright (which you do with a personal loan), insurance requirements depend on your state and whether you have a lien holder. Most states require liability insurance. If you financed the car with a personal loan and have no lien, you can choose liability-only coverage, though comprehensive and collision coverage protects your investment.
What happens if I can't make the personal loan payment?
Contact your lender when ready. Many lenders offer hardship programs, deferment, or forbearance that let you pause or reduce payments temporarily. Missing a payment damages your credit score and can trigger collection action. The lender cannot repossess the car, but they can sue you or report the debt to collection agencies.