Can You Buy a Car With a Personal Loan? It’s Complicated

Key Point

• Personal loan proceeds can be used for almost anything, but if you need a car, a car loan is a better option.
• Personal loans are unsecured, while auto loans are tied to the car you buy.

Buying a car is never cheap these days. Especially if you are looking to buy a new car. The average transaction price for a new car in March was $48,008, according to Cox Automotive.

But even if you buy a used car, you may not have enough money in your savings account to pay for it in full on the spot. So you may have no choice but to borrow money and pay off the car over time.

Now, you may want to take out a personal loan to finance your car purchase. But is it allowed? The technical answer is yes. But whether it makes sense to take out a personal loan to buy a car is a whole other story.

A car loan might make more sense

The good thing about personal loans is that you can use your income for any purpose. Want to finance your home renovation? A personal loan can help with that. Want to start a business? You can use the money you earn from your personal loan to cover your start-up costs.

Personal loans typically have no restrictions on how the proceeds can be used, so it’s technically possible to use these loans to purchase a car. But that’s not always the best bet.

Certainly, personal loans may have competitive interest rates. However, if you shop around for auto loans, you may be able to find even lower-interest loans. In some cases, auto loans are easier to pass than personal loans.

Personal loans are unsecured. That is, they are not tied to any particular asset. With auto loans, the loan is secured by the car you borrow money to buy. This means that if you fall behind on your loan payments, the lender could seize your car if you need to pay it back.

For personal loans, stopping payments can make it harder for lenders to get your money back. That’s why auto loans are so easy to hit, especially if your credit score doesn’t happen to be the best.

Be careful with personal loans

The fact that personal loans are so flexible can be both good and bad. On the other hand, being able to apply for a single loan and use the proceeds for things like home improvements is great. and A car if you have both needs.

However, due to the flexibility of personal loans, you may end up borrowing money for the wrong reasons. For example, you shouldn’t go into debt to take vacations. But if you’re tempted to sign a personal loan for your trip, you might just get on board.

Now, a car is never a frivolous purchase. You probably need it to function and do your job. So using your personal loan proceeds to buy a car isn’t necessarily a bad choice. Taking out a car loan can be a more cost-effective way to finance your car purchase.