Yes, you can use a personal loan to buy a car, but it usually costs more than a car loan
A personal loan is unsecured money you borrow and repay over time. Nothing stops you from using it to buy a car — the lender doesn't care what you spend it on. But personal loans carry higher interest rates than auto loans because the lender has no claim to the car if you stop paying. That difference in rate can add thousands to the total cost of your purchase.
The real question is whether a personal loan makes sense for your situation. It might, if you have bad credit, need to buy quickly, or want to avoid the hassle of dealer financing. It almost certainly doesn't if you have decent credit and time to shop around for an auto loan.
Key Takeaways
- Personal loans typically charge 2 to 3 percentage points more in interest than auto loans, which adds up to hundreds or thousands of dollars over the life of the loan.
- You own the car outright from day one with a personal loan, whereas an auto lender holds the title until you pay off the loan.
- Personal loans are faster to fund than auto loans and don't require a dealer or a specific vehicle, making them useful if you're buying from a private seller.
- Your credit score matters more with a personal loan — lenders check it harder and charge more if it's lower, whereas auto lenders sometimes work with weaker credit.
- A personal loan makes the most sense if you have bad credit, need cash quickly, or are buying a used car from a private party rather than a dealer.
How interest rates differ between personal and auto loans
An auto loan is secured by the car itself. If you don't pay, the lender repossesses it and sells it to recover their money. That security lets them charge lower rates. Personal loans are unsecured — the lender has no collateral, so they charge more to cover the risk.
The gap varies by your credit score and the lender, but personal loans typically run 2 to 3 percentage points higher. On a $25,000 loan over five years, that difference can mean paying $2,500 to $4,000 more in interest. A person with good credit might get a 5 percent auto loan but an 8 percent personal loan. Someone with fair credit might see 9 percent for auto and 12 percent for personal.
Shop both types before deciding. Some credit unions offer personal loans at rates close to auto loans, and some online lenders have competitive rates for people with decent credit. But if you're comparing a dealer's auto loan to a personal loan from a bank, the auto loan will almost always be cheaper.
Ownership and title: you own it immediately with a personal loan
When you finance a car through an auto loan, the lender holds the title until you pay it off. You drive it and insure it, but legally the lender owns it. With a personal loan, you own the car from the moment you buy it — the title is in your name, and the lender has no claim to it.
This matters if you want to sell the car before the loan is paid off. With an auto loan, you have to pay off the lender first, and they have to release the title. With a personal loan, you can sell whenever you want and keep any money left over after paying off the loan. It also means you can modify the car, trade it in, or do whatever you want without asking the lender's permission.
The downside is that the lender has no way to recover their money if you default, which is why they charge more interest in the first place.
When a personal loan makes sense for buying a car
You have bad credit. Auto lenders sometimes work with people whose credit scores are below 600, but they charge steep rates and may require a co-signer. Personal loans from online lenders or credit unions may offer better terms for the same credit profile, or at least give you another option to compare.
You're buying from a private seller. Private sellers don't work with auto lenders — they want cash. A personal loan lets you walk in with a check. Dealers can arrange financing on the spot, but private sales require you to bring your own money or arrange a loan beforehand.
You need the money fast. Personal loans can fund in one to three business days. Auto loans through dealers take longer because the dealer has to order a credit report, verify employment, and process paperwork. If you're in a hurry, a personal loan gets you moving faster.
You want to avoid dealer financing. Some people prefer to keep the car purchase and the financing separate. A personal loan lets you buy the car with cash (from the lender) and negotiate the price without the dealer's finance office involved.
When an auto loan is the better choice
If you have decent credit — a score of 650 or higher — an auto loan will almost always be cheaper. The rate difference is significant enough that it outweighs the convenience of a personal loan. Shop rates from banks, credit unions, and online auto lenders before you go to the dealer, so you know what you should expect to pay.
Auto loans also let you finance the purchase through the dealer, which means you don't need to bring cash or arrange separate financing. You pick the car, the dealer arranges the loan, and you drive off the same day. That simplicity is worth something, even if the rate is slightly higher than what you could get elsewhere.
If you're buying a new car from a dealer, an auto loan is almost certainly your best option. Dealers have relationships with lenders and can often get you a competitive rate, especially if you have good credit or a trade-in to put down.
What to watch out for with a personal loan
Personal loans often come with origination fees — a percentage of the loan amount charged upfront. These can run 1 to 8 percent, depending on the lender. A $25,000 loan with a 5 percent origination fee costs you $1,250 right away. Some lenders deduct the fee from the loan amount, so you receive less cash than you borrowed. Always read the loan terms to see whether the fee is included or added on top.
Some personal loans have prepayment penalties, which means you pay a fee if you pay off the loan early. This is less common than it used to be, but it's worth checking. If you plan to pay off the car loan quickly or refinance later, a prepayment penalty can work against you.
Personal loans are also usually unsecured, which means if you default, the lender can't repossess the car — but they can sue you, garnish your wages, or damage your credit. An auto lender can simply take the car back. That's actually an advantage if you're worried about defaulting, because at least you know what you're risking.
How to compare a personal loan to an auto loan
Get quotes from at least three lenders for each type of loan. For personal loans, check banks, credit unions, and online lenders like LendingClub, Upstart, or SoFi. For auto loans, get a pre-approval from your bank or credit union, then compare it to what dealers offer. Don't let the dealer's finance office be your only option.
When you compare, look at the total interest you'll pay over the life of the loan, not just the monthly payment. A lower monthly payment can hide a longer loan term, which means more interest overall. Use a loan calculator to see the total cost of each option.
Also factor in the origination fee and any other costs. A personal loan with a 5 percent origination fee and a 7 percent interest rate might actually cost more than an auto loan at 5 percent with no fee, even though the stated rate is lower.
Frequently Asked Questions
Can I get a personal loan if I have no credit history?
It's harder, but possible. Credit unions sometimes work with people who have no credit history, especially if you're a member. Online lenders like Upstart consider factors beyond credit score, such as income and employment history. You may need a co-signer or be charged a higher rate. An auto loan might actually be easier to get in this situation, because the car itself serves as collateral.
What happens if I can't pay back the personal loan?
The lender can sue you for the unpaid balance, garnish your wages, or place a lien against your assets. Your credit score will drop significantly. Unlike an auto loan, the lender can't simply repossess the car — but you still owe the full amount. If you're worried about making payments, a personal loan is riskier than an auto loan because you have fewer protections.
Can I use a personal loan to buy a car and then refinance it as an auto loan later?
Yes, but it's uncommon. Once you own the car outright, refinancing it as an auto loan means taking out a new loan and using it to pay off the personal loan. Lenders call this a "cash-out refinance," and it's possible but not widely offered. You'd need to own the car free and clear, and the new lender would need to verify the car's condition and value. It's usually simpler to just keep the personal loan.
Does using a personal loan to buy a car hurt my credit score?
Taking out any loan triggers a hard credit inquiry, which temporarily lowers your score by a few points. Over time, making on-time payments on a personal loan actually helps your credit by showing you can manage different types of debt. Missing payments, however, will damage your score significantly. The impact is similar whether you use a personal loan or an auto loan.
What if the car breaks down after I buy it with a personal loan?
You're responsible for repairs — the lender doesn't care. With an auto loan, you're also responsible for repairs. The difference is that an auto lender requires you to carry comprehensive and collision insurance, which covers some damage. With a personal loan, insurance is your choice, though your state requires liability coverage. Buy a used car inspection before you purchase, regardless of how you finance it.