Personal loans can be used to purchase almost anything, including cars. Personal loans work a bit differently from Auto loans, however, and using one for a car might not be your best course of action. Here's the scoop on using a personal loan for a car, and what you might try instead.
Should I Use a Personal Loan for a Car?
If you qualify for a personal loan either through a bank, credit union, or online lender, you can use it for nearly any purpose. You could take the money and use it to purchase a car, but an auto loan may be a better deal.
See, personal loans typically have a higher interest rate and shorter loan term than an auto loan, making them less ideal. One reason why personal loans have higher interest rates is that they're unsecured loans. An auto loan has the vehicle as collateral, which allows lenders to keep rates down since they can repossess the car if you stop paying.
It can also be more difficult to qualify for a personal loan if your credit score is less than good. Typically you need a decent credit score to work with a bank for a personal loan. Auto loans can be easier to come by for bad credit borrowers since there are subprime lenders willing to work with these borrowers in many situations.
Can a Personal Loan Be Used as a Down Payment
A personal loan typically can't be used as a down payment on an auto loan. This is usually because auto loan lenders want to see you invest your own funds into the down payment on a car. Even if you do qualify for another loan after taking out your personal loan, you're now stuck with two loans to pay off.
It's been shown that borrowers who invest their own money in an auto loan down payment are more likely to complete their loans. If you don't have the cash for a down payment, lenders also accept trade-in equity. If you have a vehicle to trade, you could end up with a decent down payment, since used car prices are high right now. This means you could get more for your trade than you may have in the past.
Are Personal Loans Bad?
Personal loans are what you make of them. If you make your payments on time, a loan can be an excellent way to build credit. However, loan mismanagement can lead to problems. You could end up with a loan in collections and a lower credit score if you let your payments fall behind, or miss them altogether. This could mean you won't be able to take out a loan in the future.
What Kind of Loan is a Personal Loan?
A personal loan is a type of installment loan. This means you get a set amount of money and pay it back on a set schedule. Installment loans are a type of credit and differ from credit cards, which are revolving credit – meaning you have a maximum limit to spend as long as you make payments.
Are Personal Loans Secured or Unsecured?
Personal loans are not secured by collateral, which makes them an unsecured loan. These come from banks, credit unions, and online lenders. If a loan is secured it means there is something that can be reclaimed by the lender such as a car, a house, or property.
Personal loans don't carry the same consequences as a secured loan, so if you miss your payments, you're sent to collections, could face additional charges or fees, and may have trouble securing a loan in the future.