Can I Use a Personal Loan to Buy a Car?

A personal loan can be used for almost anything, including car purchases. However, just because you can use a personal loan to buy a car doesn't mean you should. There are only a few circumstances, most of them relatively rare, in which a personal loan is a better solution than a traditional auto loan to finance a vehicle.

Here's the skinny on personal loans, when they make sense for car purchases, and when they don't.

How personal loans work

Many loans are designed for a specific type of purchase (mortgages for homes, auto loans for cars, and so on), but personal loans are for anything. You can use the proceeds from a personal loan however you'd like, whether it's to refinance debt, go on a vacation, or buy a car.

When deciding whether to give you a personal loan, a bank looks at your income, credit score, and any monthly obligations you have. From there, the bank decides how much it can lend to you, and on what terms.

Because a personal loan isn't contingent on how you plan to use the money, there aren't any outside forces that can throw a wrench in your plans. You might apply for a $10,000 personal loan with the plan to buy a car at some point in the next month or two. With cash in hand, you can confidently pay cash for a car you find on a dealer lot or on websites like Craigslist or eBay. You don't have to wait to find a car to apply for a personal loan.

When you accept a personal loan, the funds are typically disbursed by direct deposit into a savings or checking account. If you accept a $10,000 loan today, you could easily have the money in your bank account in as little as 24 or 48 hours.

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Finding the lowest interest rate for your personal loan

To make sure you're getting a fair interest rate for your loan, compare 2-3 lenders (or more!) before signing on the dotted line. Not sure where to start? Check out our list of best low-interest personal loans, which includes reviews from our experts.

When it can make sense to use a personal loan to buy a car

To be clear, a personal loan is not a car loan -- it's not specifically issued for a vehicle purchase. Still, there are some times where it may make sense to use a personal loan instead of a traditional auto loan to buy a car.

Here are some scenarios where a personal loan can make sense:

You're buying a car from a private party. While banks offer auto-specific loans to purchase cars from individuals, you need to find a patient seller willing to jump through some hoops. Understandably, sellers who list their cars on Craigslist, eBay, or Bring-A-Trailer would prefer cash or a cashier's check rather than going through a multi-day wait for you to get approved to buy their specific car. It can make sense to use a personal loan to fund this purchase.
You don't want to carry full coverage insurance. To get a traditional auto loan, you need to carry "full coverage" car insurance for the vehicle, which includes collision and comprehensive coverage to provide financial protection against damage, theft, and other risks. If you use a personal loan to buy a car, you don't have to carry full coverage auto insurance. That can save you some money. For example, if you want to buy a $3,000 car for a high-risk 16-year-old driver, a personal loan and liability insurance policy may be less expensive than an auto loan and comprehensive insurance.
You're buying a project car. Sorry, shade-tree mechanics, most banks aren't interested in making auto loans for cars that aren’t road-worthy. Older cars, damaged cars, or cars with salvage or rebuilt titles can be difficult to finance with a traditional auto loan. If a car looks more like a pile of parts than an operable vehicle, a personal loan may be the only way to finance it.

To be clear, these are very specific circumstances that affect a minority of people buying cars. Even then, it's not clear that using a personal loan to skirt auto lenders' insurance requirements or to fund the purchase of a project car is the smartest financial move. But if you're going to do it, a personal loan may be the only way.

Why you might not want to use a personal loan to buy a car

Traditional auto loans exist because they're a better fit than a personal loan for the vast majority of used or new car purchases. Here's why you might want to stick with the tried-and-true auto loan when buying a car:

Personal loans can carry high interest rates. Whereas a car loan is ultimately backed by collateral (a car), most personal loans are not backed by collateral. As a result, lenders typically charge higher interest rates on personal loans than on car loans. People with good credit, with very few exceptions, pay as much or more for a personal loan as for a similar auto loan. A handful of banks have rolled out unsecured loans (no collateral) designed for auto purchases -- with similarly low rates despite being unsecured -- but only people with very high incomes and excellent credit scores qualify.
Less time to repay. While the typical personal loan is repaid in three years, some lenders stretch out loans to five years. In contrast, car loans can have repayment terms of seven years, sometimes even longer. While I wouldn't recommend stretching out a loan as long as possible, some borrowers simply need more time to repay an auto loan. If a longer loan term is a priority, an auto loan is the best way to go.
Larger limits. All else being equal, it's generally easier to borrow more money when the loan is backed by collateral than when it isn't. A borrower who easily qualifies for a $20,000 auto loan may only qualify for a $10,000 personal loan. In addition, lenders often have hard caps of $40,000 or less for personal loans, whereas true auto loans usually have much higher limits for those with the income and credit score to support it.

You can use a personal loan to buy a car, and in some cases, it can be the easiest and most practical solution. But auto loans remain the most popular way to finance a car for the simple reason that they often offer the best mix of interest rates, repayment terms, and availability for the vast majority of car purchases.