Personal loan

Can I buy a car with a personal loan?

Yes, you can buy a car with a personal loan, in theory, but there are plenty of reasons not to. Personal loans can generally be used for many things, but they can also be more of a problem than they’re worth and encourage overspending. If you are looking for a vehicle, a car loan is usually the solution. Here’s why.

Personal Loans vs Car Loans

Many people assume that a personal loan is easier to get than a car loan, and that’s just not the case. Personal loans aren’t secured by anything, so lenders usually don’t have much recourse if you stop making payments.

Auto loans, on the other hand, are secured by the vehicle you are financing. If you stop making payments or fail to repay the loan, the lender can repossess the car to recover their costs.

Another reason why getting a car loan is better is that they usually come with lower interest rates and are usually simple interest loans. Interest is the cost of borrowing money, and the more secure the loan, the less interest you are likely to pay. Interest rates are also largely influenced by your credit score, so the better your credit, the lower your interest rate can be.

Also, personal loans usually have a lower loan amount than a car loan. So, if you want to use a personal loan to buy a car, your options will likely be limited. Not only will you only be able to buy a cheap vehicle, but you’ll likely have less time to pay off the loan, which means higher monthly payments.

Rather than using a personal loan to buy a car with no strings attached, an auto loan can save you money over time. The goal is not to get the biggest loan possible, but to get a loan large enough to finance an affordable and reliable vehicle.

Credit scores for car financing

Car loans usually have many requirements that vary depending on your situation and the lender you apply to. Your credit score is an important factor in overall car loan approval.

Your credit score is a three-digit number between 300 and 850 on the FICO credit score model. The higher your number, the better the score and the more loan possibilities you have. There are five levels in the FICO scoring model ranging from super prime (very good, 781 and above) to deep subprime (very bad, 500 and below).

When buying a car, however, you can classify your credit into two categories: good or bad.

Typically, the dividing line drops to 670. If your score is below that, you may need more documentation to get a car loan, need a larger down payment, be required to get a co-signer, or have trouble getting approval. from a direct lender such as a bank or credit union.

To note: Most auto lenders use FICO when reviewing your credit score, although there are other scoring models available, such as VantageScore. FICO is the oldest and most widely used credit scoring company (they literally invented the concept!).

Good car loans

If your credit score is 671 or higher, you’ll probably have an easier time qualifying for a car loan, as long as all your ducks line up and you can afford the loan. Depending on the level of your score, you may need to bring little more than a valid driver’s license and proof of income. Realistically, come prepared with documents such as pay stubs, personal references, and proof of a working phone in your name.

When you’re in good credit, you have the power to choose your vehicle from any dealership, negotiate your price and take delivery. You may qualify for lower interest rates, shorter loan terms, and more vehicle options than someone struggling with credit.

As a good borrower, you’re also more likely to qualify for an auto loan from a direct lender. Getting pre-approved for a loan through a bank or credit union makes you a cash buyer in the parking lot, so you can just sign and drive.

But what if your credit isn’t so hot? No worries, there is a wide range of loan options for borrowers who fall below this bad credit threshold.

Car loans for bad credit

Credit scores are huge when it comes to car loans, but that’s far from the only thing you need to qualify. Lenders also look at your credit report and if you are a borrower with bad credit, they dig even deeper to help you get a car loan with bad credit based on other factors.

Bad credit lenders, called subprime lenders, look beyond your credit score to see if you have the ability, stability, and willingness to take out a car loan. To do this, they require proof of your income, employment, and residency, as well as additional information and a deposit.

If your situation does not qualify you for a loan from a lender with bad credit, you are still not out of options! There is another class of lenders called insider financiers, and they can often help you when you’ve been turned down by a subprime lender at a dealership.

In-house financiers are often referred to as Buy Here Pay Here (BHPH) dealerships, and they provide you with both the vehicle and the cash you need to get it. Since you’re paying the lender directly, you often have to make the payment in person and you may have to pay more than once a month. Ultimately, a loan from a BHPH dealer approximates the interest rates of a personal loan in some cases, but may still be a better option. To qualify for one of these loans, you usually only need proof of income, a valid driver’s license and a down payment.

Auto loans versus personal loans for buying a car

Ultimately, an auto loan is designed specifically to help borrowers in need access the vehicles they want.

Sometimes the car we want for borrowers with bad credit is beyond our means, and many borrowers assume that a personal loan will help them. Often, however, a personal loan can only help in a handful of situations, like needing a few thousand to buy a used car from your grandmother or a neighbor.

If you don’t have the luck you thought you had when you started your car buying journey, it might be time to try a subprime lender. These lenders work with people who have bad credit and those who have none at all.

AT Auto Express Credit, We want to help connect you with a local dealer who has signed up with the lenders you need. Simply fill out our quick and free car loan application form and we’ll get to work right away to connect you with a dealership.