Can You Use a Personal Loan for a Car Down Payment?

When you buy a car and borrow to do so, your lender may require you to make a down payment on the vehicle. The required down payment can vary, but sometimes it could be as high as 10% or more of the car's value. With the average price of a new car coming in at $48,008 as of March 2023, this could mean you need around $4,800 or more to get a vehicle of your own.

If you don't have this much money in your bank account and you need a vehicle, you may be looking for options. And one solution that might seem attractive is obtaining a personal loan, since the proceeds of a personal loan can be used for just about anything you want.

But, can you use a personal loan as a down payment for a car? Here's what you need to know.

Will your dealer allow a personal loan?

In many cases, your dealer is not going to allow you to use a personal loan as a down payment for a vehicle.

One purpose of the down payment requirement lenders put in place is to ensure you have some money invested in the vehicle so you have an ownership stake and want to keep the car (and keep making payments on the loan). If you get a personal loan, you won't have this skin in the game and that makes lenders very nervous that you'll default on the car loan.

If your dealer won't let you use a personal loan, then this option is off the table.

Can you qualify for both a personal loan and a car loan?

There's also another potential obstacle to using a personal loan to make a down payment on a car. You will have to apply for both the personal loan and the car loan. And, it is possible that you won't be able to get approved by both lenders.

Lenders typically consider how much debt you have relative to your income when deciding if you are allowed to get a loan or not. If you take out a personal loan in order to get the money for a car down payment, this is going to show up in your credit record. Your auto lender may find you owe too much relative to what you earn, or more simply be concerned that you're taking on so many financial commitments at once.

Now, if you have plenty of income, you may be able to qualify for both the car and personal loans -- especially if you also have a good credit score. But, you can't count on that being the case. You don't want to get a personal loan for a down payment, only to find out that this action cost you the chance to borrow anything for the car at all.

Is using a personal loan to buy a car really a good idea?

Finally, you should stop to think about whether it's actually a smart move to use a personal loan to buy a car. You'll be taking on a lot of obligations that could make affording the bills harder if you do that. And, if you have to sell the car or if it is totaled in an accident, you may not get enough money to pay off both the auto and personal loan.

For all of these reasons, you should usually steer clear of using a personal loan for a car down payment. Instead, wait to buy your car until you've saved up the funds you need. It may take a little longer, but you won't regret it.