Can I use a personal loan to buy a car?

A personal loan gives you the flexibility to borrow money for a variety of reasons, including purchasing a car. Unlike a car loan, which is specifically designed for vehicle purchases, a personal loan doesn’t restrict how you use the borrowed funds. This means you can use the loan amount to buy a car, cover registration and insurance costs, or even fund repairs and modifications.

If you opt for an unsecured personal loan, you won’t need to use the car as collateral. This can be beneficial if you’re buying an older used vehicle that might not qualify for a traditional secured car loan. However, unsecured personal loans generally come with higher interest rates compared to secured personal loans.

A car loan is not very different from a personal loan. However, as the name suggests, a car loan can only be used to buy a new or used vehicle, whereas a personal loan gives you the flexibility to use the funds as you see fit.

Flexibility

Car loans often come with restrictions, particularly when purchasing a used vehicle. Some lenders may not allow you to finance a car beyond a certain age, which can limit your choices if you’re shopping on a budget.

With a personal loan, you’re not bound by such restrictions. You can also get a personal loan to buy a used car. You don’t need to specifically say what you’re buying when you take out a personal loan, meaning you can get a car of your choice without any restrictions from the lender.

Secured vs unsecured loans

Car loans typically require you to use the vehicle as collateral. This means that if you default on repayments, the lender has the right to repossess your car.

A personal loan can either be secured or unsecured. An unsecured personal loan doesn’t require any kind of collateral, but you might have to pay a higher interest rate if you’re getting an unsecured personal loan for a car. Having said that, a good credit score and financial history might help you negotiate a better rate with your lender.

Cost of borrowing

When thinking about using a personal loan to buy a car, the interest rate is a big factor. Personal loans often come with higher rates than car loans, which are designed specifically for vehicle purchases. That’s why it’s crucial to look beyond just the loan amount—check the total cost of borrowing and compare interest rates across different lenders to make sure you're getting the best deal.

Fixed vs variable rate

If you’re confused between a car loan and a personal loan to finance your car, also consider the type of interest rate you’re most comfortable with. The majority of car loans have a fixed interest rate, while you can find plenty of options for both fixed-rate and variable-rate personal loans. 

The advantage of getting a fixed-rate car loan is that you’re going to make the same monthly or fortnightly repayment throughout the fixed term. Having steady repayments makes it easier to budget, but you might find yourself paying more than the market rate if the variable interest rates go down. Meanwhile, with a variable interest rate, you could potentially save money in a low rate environment - or pay more if your lender announces a rate hike. 

Overall, a fixed rate car loan does offer you the ability to budget and pay down your loan steadily over the term. However, you’ll perhaps find it hard to get a car loan that’s flexible at the same time. So, if you happen to have some extra dollars at some point in time and decide to pay off the car earlier, you might not be able to do so on a fixed-rate loan without incurring fees. If flexibility is a priority, a variable-rate personal loan may work better than a fixed car loan, as it often allows early repayments and adjustments

The decision to get a personal loan for a car, sticking to a car loan, or dealership finance can be tricky. Buyers need to consider several factors, including the interest rate and payment terms. Your credit history might also impact your decision. That’s because personal loans are more easily approved for creditworthy borrowers who may also enjoy more competitive rates than individuals with an average score.

However, if you’re going for a regular car loan, an average credit history won’t necessarily stand in the way of approval. In addition, as the interest rate and the borrowing for a car loan also depend on the price of the car, your credit score might have a lower impact on key loan terms compared to a personal loan. 

Don’t forget to consider the interest rates for both car loans and personal loans to compare which one is more affordable before opting for dealership finance. Getting your car financed by the dealer is usually quick and convenient, but might cost you more in the long run. It’s always a good idea to compare rates and deals between multiple lenders as it increases your chances of landing a more competitive deal with reasonable terms.