Can You Use a Personal Loan to Buy a Car?

Ready to hit the road in a new or used car, but feeling a little sticker shock? You’re not the only one. In 2025, the average used car price has climbed to over $26,000, and new cars are topping $41,000—making it tough for most people to pay cash upfront. That’s why car loans and personal loans have become essential tools for drivers.

So, can you use a personal loan to buy a car? And more importantly, does it make sense for your situation? Let’s understand why some buyers consider personal loans for car purchases, how they compare to traditional auto loans, and what you should think about before making your move.

Whether you’re eyeing a used car from a private seller or want more flexibility in your financing, we’ll help you understand if a personal loan is the right fit for your next car purchase. Keep reading to find out which path could put you in the driver’s seat without breaking your budget.

Yes, you can use a personal loan to buy a car, as long as you meet the lender’s approval. Personal loans are known for their flexibility, which means you can use the funds for almost anything, including purchasing a vehicle. You’re not limited to just certain types of cars or sellers, unlike with an auto loan, which can only be used for buying a vehicle and often comes with restrictions.

There are generally no legal barriers to using a personal loan for a car purchase. Most lenders allow you to use personal loan funds for buying a car, as long as you qualify for the loan. However, a few lenders may have specific restrictions on how you use the money, so it’s always wise to check the terms before you apply.

While most people choose auto loans for car financing, personal loans can make sense in certain situations:

• Private Party Sales: If you’re buying a car from a private seller (instead of a dealership), a personal loan can be a simple way to get the funds you need.
• Older or Specialty Vehicles: Auto loans often have restrictions on the age, mileage, or type of car you can buy. Personal loans don’t usually have these limits, making them a good fit for classic cars, older vehicles, or unique rides.
• Nontraditional Purchases: If you want to buy a car at an auction, from a friend, or even combine your car purchase with other expenses, a personal loan offers the flexibility to do so.

Despite their flexibility, personal loans are less common for car purchases due to higher interest rates and stricter credit requirements. In fact, less than 2% of personal loans are used for car financing. Most borrowers still prefer auto loans because they usually come with lower rates and longer repayment terms.

Thinking about using a personal loan to buy your next car? Here’s a simple breakdown of how it works:

Lump-Sum Funding and Flexibility

When you’re approved for a personal loan, you receive your money as a lump sum. It means you get the entire approved amount all at once. This gives you the flexibility to shop for your dream car wherever you want, whether it’s at a dealership, from a private seller, or even at a car auction. You’re not limited by the rules that come with traditional auto loans, so you can focus on finding the right vehicle for you.

Application and Approval Process

Applying for a personal loan is straightforward and can often be done online. Here’s what you can expect:

• Fill out a simple application with your personal and financial details.
• Submit required documents, such as proof of income and identity.
• The lender will review your credit score and financial history.
• If approved, you’ll receive an offer detailing your loan amount, interest rate, and repayment terms.
• Once you accept, the funds are usually deposited directly into your bank account (sometimes as quickly as the same day).

Using Funds: Dealership vs. Private Seller

With a personal loan, you’re in control of how you use the money. Want to buy from a dealership? No problem. Prefer to buy from a private seller or a friend? That works too. You can even use part of the funds for related expenses, like registration, insurance, or repairs. This freedom is what makes personal loans a popular choice for buyers who want more control over their car purchase.

A personal loan gives you lump-sum cash and the flexibility to buy your car your way. The process is quick, easy, and puts you in the driver’s seat from start to finish.

When you’re deciding how to finance your next car, it’s important to understand how personal loans and auto loans stack up. Let’s break down the main differences so you can choose the option that fits your needs and budget.

Collateral Requirements (Secured vs. Unsecured)

Personal loans are usually unsecured. This means you don’t have to put up your car (or anything else) as collateral. If you miss payments, your car won’t be repossessed, but your credit score could take a hit.

Auto loans are secured by the car you’re buying. If you can’t make your payments, the lender can take back the car to recover their money.

Interest Rates and APRs

Personal loans typically have higher interest rates because they’re unsecured. Rates can go as high as 36%, depending on your credit score and the lender.

Auto loans usually offer lower rates since the car serves as collateral, making them less risky for lenders. Good-credit borrowers can often find single-digit rates.

Repayment Terms and Monthly Payments

Personal loans often come with shorter repayment terms, usually 1 to 5 years. This can mean higher monthly payments but a quicker payoff.

Auto loans generally have longer terms, ranging from 3 to 8 years, which can lower your monthly payment and make budgeting easier.

Credit Score Requirements and Eligibility

Personal loans can be harder to qualify for, especially if your credit isn’t strong. Lenders look at your income, credit score, and debt-to-income ratio.

Auto loans are often easier to get approved for, since the car acts as collateral. Even borrowers with fair credit may qualify for a decent rate.

Personal loans don’t require a down payment. You get the full loan amount upfront and can use it as you wish.

Auto loans may require a down payment, especially if you want to lower your monthly payments or qualify for a better rate.

Choosing a personal loan for your car purchase comes with several unique benefits. 

No Collateral Required

With a personal loan, you don’t have to put up your car or any other asset as collateral. This means if you ever run into trouble making payments, your car isn’t at risk of being repossessed by the lender. For many buyers, this peace of mind is a big plus.

No Down Payment Needed

Unlike many auto loans that require a down payment, personal loans typically don’t ask for any money upfront. You can finance 100% of your car’s price, which is helpful if you want to keep your savings untouched or don’t have extra cash on hand.

Fast Funding and Flexible Use

Personal loans are known for their quick approval and fast funding—sometimes you can get your money the same day or within 24-48 hours. This speed is especially useful if you find a great deal from a private seller or at an auction and need to act fast. Plus, you can use the funds however you like, whether it’s for a new car, a used car, or even to cover extra costs like insurance or registration.

Easier Title Transfer 

When you use a personal loan, the car is yours from day one. The vehicle title is in your name, not the lender’s, making it easier to sell or transfer ownership in the future. You don’t have to deal with the hassle of the lender’s name on your registration or extra paperwork when you want to make a change.

Shop Where You Want

Personal loans give you the freedom to buy from a dealership, a private seller, or even at an auction. You’re not limited by dealership-only financing or strict car age and mileage rules.

While personal loans offer flexibility and quick access to funds, there are some important drawbacks to consider before using one for your car purchase.

Higher Interest Rates

Personal loans usually come with higher interest rates than auto loans (sometimes as high as 36%). Even borrowers with good credit often pay more in interest on a personal loan compared to a traditional car loan. Over time, this can make your car much more expensive than you planned.

Shorter Repayment Terms and Higher Monthly Payments

Most personal loans have shorter repayment periods (generally between 1 and 5 years). In comparison, auto loans often stretch from 3 to 8 years. This means your monthly payments will be higher with a personal loan, since you have less time to pay off the same amount.

Stricter Credit Requirements

Since personal loans are usually unsecured (no collateral), lenders take on more risk. As a result, they tend to have stricter credit requirements. If your credit score is below 660, you may have trouble qualifying, or you might only be offered high interest rates. Bad credit personal loans are available, but expect the cost to be steep.

Lower Maximum Loan Amounts

Personal loan lenders often set lower maximum loan amounts compared to auto loans. This means you might not be able to borrow enough to cover the full price of the car you want, especially if you’re shopping for a newer or more expensive vehicle.

Auto loans usually offer lower interest rates and longer repayment terms, making monthly payments more affordable. They’re ideal if you’re buying from a dealership or need to borrow a larger amount for a newer or pricier car.

If you have a strong credit score, an auto loan can help you get the best rates and save money over time. In short, auto loans are often the smarter, more cost-effective choice for many car buyers.

Getting a personal loan for your car purchase is simple if you follow these key steps. Here’s how to make the process smooth and stress-free:

1. Research and Decide How Much You Need

Start by figuring out the price range for the car you want. Knowing your target amount helps you avoid borrowing too little or too much. Remember, personal loans are given as a lump sum, so plan carefully to cover the car’s cost and any extra expenses like registration or insurance.

2. Compare Lenders and Offers

Don’t settle for the first offer you see. Shop around with banks, credit unions, and online lenders. Compare interest rates, loan terms, fees, and any prepayment penalties. Look for lenders that offer prequalification—this lets you check your rates without affecting your credit score.

3. Prequalify and Apply

Once you find the best deal, prequalify if possible to see your personalized rates. When you’re ready, fill out the application with your personal and financial details. Be ready to provide documents like proof of income and ID.

4. Receive Your Funds

If approved, the lender will deposit the loan amount directly into your bank account. This can happen as fast as the same day or within a few days.

5. Buy Your Car

With your funds in hand, you can buy your car from a dealership, private seller, or even at an auction. You’re free to use any leftover money for related expenses or to make an early loan payment.

6. Start Repayment

Your first payment is usually due about a month after you get your loan. Set up automatic payments if you can—some lenders even offer a small discount for autopay. Always pay on time to protect your credit score.

Related: Should I Pay Off My Car Loan Early

• Improve your credit score before applying, if possible.
• Borrow only what you need to keep your payments manageable.
• Compare multiple lenders to find the lowest rates and best terms.
• Read the fine print for any hidden fees or penalties.

Choosing between a personal loan and an auto loan for your car purchase comes down to your personal needs and financial goals. Here’s a quick checklist to help you decide:

Checklist: Factors to Consider Before Choosing

• Interest rates and APR: Compare the rates for both loan types. Lower rates mean lower overall costs.
• Loan terms: Look at how long you’ll have to repay and what that means for your monthly payments and total interest.
• Down payment: Will you need to put money down? Personal loans usually don’t require one; auto loans might.
• Credit score: Check your credit score and see which loan you’re more likely to qualify for.
• Loan amount: Make sure the loan can cover the car you want—auto loans often allow for higher amounts.
• Fees and charges: Watch for processing fees, prepayment penalties, and other costs.
• Flexibility: Do you want to use the funds for other expenses, or just the car purchase?

Finding the right car financing is all about what works for you. Personal loans offer flexibility and quick funding, while auto loans usually come with lower rates and longer terms. Before you decide, take a close look at your financial situation, compare offers, and use tools like loan calculators to understand the true cost.

Shop around, ask questions, and choose the financing that puts you in the driver’s seat, both on the road and with your money.

Related: How To Remove A Cosigner From A Car Loan