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Buying a car is a big financial decision. If you’ve decided on your next vehicle but need help funding the purchase, getting a loan to buy a car is a common solution.
An auto loan is a common way to buy a car, but can you use a personal loan to buy a car as well? The short answer is yes, but you should know a few caveats before taking out a personal loan for your vehicle purchase.
You can use a personal loan to buy a car, though in most cases, you might be better off taking out an auto loan for your next vehicle.
One way using a personal loan to buy a car might be useful is if you’re purchasing a project car to fix up. For example, you might want to rebuild a non-operational 1960s muscle car that has a salvage title from a private seller. Personal loan funds can be used to purchase a vehicle in this condition, and a personal loan lender doesn’t have a vested interest in your purchase.
However, getting an auto loan for this project car might be challenging. Auto loans use https://installmentloansgroup.com/installment-loans-ri/ the vehicle that’s purchased as collateral if you default on the loan. This means that auto loan lenders will consider the vehicle you’re purchasing and its value, compared to your desired loan amount. This minimizes the lender’s risk of a financial loss if it needs to repossess your car to pay off the loan.
Auto loans are installment loans that are used specifically for the purchase of a vehicle, like a car or a motorcycle. When you take out an auto loan, you agree to repay the lender over an agreed-upon timeline for the principal loan balance you have borrowed, plus interest.
Typically, factors like your credit score and down payment factor into whether you’re approved for an auto loan. These loans use your car as collateral, so if you’re unable to make your installment payments, the lender may choose to repossess your car. In exchange for the secured loan, auto loan borrowers may see lower auto loan rates and longer repayment terms, which can help make monthly payments more manageable.
Personal loans are also installment loans you pay over time. However, unlike car loans, personal loan funds can be used for many different needs, including debt consolidation and emergency expenses. Personal loans are generally unsecured, so if you use one to fund your vehicle purchase, you’re not required to use your newly acquired vehicle as collateral.