Can I use a personal loan to buy a used car?

Can I use a personal loan to buy a used car?

Can I use a personal loan to buy a used car?

Whether it’s to consolidate high-interest debt or help with large purchases, such as a car, a personal loan can be a convenient option. Personal loans are the fastest-growing type of consumer debt, according to Experian, with 11 percent of American consumers having a personal loan averaging $16,259.

Personal loans are just that — loans for any type of personal use. These loans can come from a bank or other lending institution that lets you borrow a predetermined amount of money that you repay. Those monthly payments will go toward both the original balance and the interest you’re being charged for the personal loan.

Getting a personal loan requires doing some research. You may have seen those offers via mail or email inbox luring you with offers of an easy application process, great rates and terms.

Carefully compare rates to make sure you’re getting the loan that’s best for you. Use a site  Credible to get prequalified for loans ranging from 1,000 to $100,000 in just two minutes.

You can compare rates side-by-side with zero impact on your credit score.


So you’ve got your eye on a new or used car you want to purchase. Getting a traditional auto loan from the car dealer isn’t the only way to finance the car. In fact, it may even make more sense to get a personal loan, depending on your situation. While this is less common, with only about 4 percent of car buyers using a personal loan for their purchase, it can be a viable option.

The first step to getting a personal loan is filling out an application to get the qualification process started. The lender will closely review your income, employment history and credit score to determine whether you will get a loan and at what rate. The lower the interest rate the less you’ll have to repay in the long run.

Some tips on getting the best interest rate include:

  • Shopping around to know what rates are available
  • Checking with the lending institution you already have a relationship with
  • Improving your credit score
  • Using collateral
  • Selecting a shorter repayment period

Most people don’t enjoy the haggling in the finance department that comes along with financing a car directly from the dealer. Walking into the showroom already knowing you have the funds to pay for the car through a personal loan can make the process much easier and gives you a little more power when it comes to working out the price of the car.

Whether you select an auto loan or personal loan, sticking to your budget is key. To help determine your approximate repayments costs try using an online personal loan calculator for peace of mind and use Credible to see what rates you qualify for.


Auto loan vs. personal loan

One of the primary features that make personal loans different from car loans is that personal loans are unsecured. While your car can be repossessed if you don’t repay an auto loan as agreed, there’s no asset connected with a personal loan. However, because an unsecured loan is risky, personal loans often have higher interest rates.

An auto loan has restrictions as to the type and age of car you’re purchasing. A personal loan has no restrictions as to what you can use the funds to buy. Also, you can buy the car with a personal loan and if there are funds leftover you’re free to spend it any way you want.


Un auto loans, prepayment penalties and fees are often associated with personal loans.

When taking out a personal loan for a vehicle purchase makes financial sense

  • If you’re buying a car directly from an owner and not the dealer, a personal loan is ly the only way to go. Without the help of a finance department on-site, you have to come up with the money for the vehicle yourself.
  • You want ownership of your car immediately. With a personal loan you own the car outright without having to wait until the final payment is made as with auto loans.


  • There’s no restriction on a personal loan if you want to buy a much older car. With some car loans, you can only buy a used car if it’s under a certain age. This usually rules out the classic car enthusiasts looking for a 1969 Pontiac GTO.
  • You want a more affordable insurance policy. With personal loans, you’re not required to carry full coverage and can shop around for a less expensive policy.

Why a personal loan may not be the way to go for this kind of purchase

  • If you want the most competitive rates for your car purchase, an auto loan may be the way to go. Their rates are often more competitive because it’s a secured loan.
  • Credit plays an even larger role for an unsecured personal loan. It can be more challenging to qualify for a personal loan if you have a lot of blemishes on your credit. If you do get the loan with credit blemishes, you will ly wind up paying a much higher interest rate.


Buying a car with a personal loan

Can I use a personal loan to buy a used car?

If you need finance to buy your car, a personal loan or bank loan from a bank or building society can be one of the cheapest ways of borrowing the money if you can get a good rate. But remember to look into the pros and cons of personal loans first. Read on to get the facts you need.


Securing a loan against your home risks the roof over your head if you don’t keep up the repayments. You may get a better rate if you do but is this worth the risk?

A personal loan and a bank loan are different names for the same thing.

You can use these loans for a used car or a new car – you’re not limited in your choice.

Shop around for the best interest rate by comparing annual percentage rates (APR). The APR includes interest and all of the lender’s other charges. This can be done before you go to your dealer so you’re armed with how much you can borrow at what rate.

Applying for a personal loan may affect your credit rating as the company lending you money wants to check if it can trust you to pay it back.

Be careful about this if, for example, you’re also planning to take out a mortgage. You can limit the impact on your credit rating by using an eligibility calculator that does a soft search.

Soft searches don’t have any impact on your credit rating. Search online for other comparison sites that offer soft searches.

You can check your credit score for free from the credit score companies, MSE Credit Club, Credit Karma, and, ClearScore. Some also offer to match you to loans with a soft search.

Check the monthly repayment amount and the total amount you’ll end up paying the lender. This can help you find the most affordable option and the one that will cost you the least overall.

Make sure its affordable. If you’re not sure whether you could meet the monthly payments on top of your household expenses, work out what you can afford.

Always check whether the interest on your loan is fixed or variable. If it’s fixed, the interest rate will stay the same until the loan is paid off.

A variable interest rate can go up or down. Be very careful with loans this – if you can only just make the initial repayments you could get into money trouble if interest rates go up, so think carefully before taking them out.

If you own your own home, you might be tempted to consider a secured loan.

However, this is a much riskier option as the money you borrow is secured against your home.

This means that if you can’t repay the loan, the lender could force you to sell your home to pay off what you owe.

Find out more about secured and unsecured loans.

Pros of personal loans

  • It’s one of the simpler ways to finance your car.
  • Can be arranged over the phone, internet or face-to-face.
  • Can be for the whole cost of the car, or for a part of it.
  • If you have a good credit rating you should get access to the best rates available. If you can get access to the best rates a personal loan could be cheaper than dealer finance. However, if there’s a 0% finance on offer it’s possible that may work out cheaper.
  • Interest rates are normally fixed – although they can be variable, so always check.
  • You choose the loan period (typically one to seven years), but remember – the longer the term the more you are ly to pay in interest overall.
  • Un with some other forms of car finance, you own the car while paying off the loan so if you got into financial difficulties you could sell it.

Cons of personal loans


If you’re planning to borrow just under £3,000, it might be worth borrowing a little extra in order to get a cheaper rate.

This is also true if you want to borrow just under £5,000.

For instance, the APR for loans of £3,000-£4,999 could be 12%, yet as little as 3% for loans of £5,000-£7,499.

  • Monthly payments can be higher than other forms of finance, but this depends on the term, and costs.
  • You might need to wait for the money to come through, although some lenders make funds available almost immediately.
  • Many people can’t get advertised rates. The rates advertised are often what is known as ‘representative’ or ‘typical’ APR’s. This means only 51% need to be eligible. Having a good credit score will help but does not guarantee you can get it.
  • As you own the car you will be responsible for all repairs.
  • You might end up borrowing more than you planned. That’s because most banks won’t lend less than £1,000 or for less than 12 months, or because interest rates might reduce the more you borrow offering a temptation to increase the size of the loan.

How a bank/personal loan for a car works

You can use a bank loan to purchase a car privately as well as from a dealership. That’s because once the loan money is in your account, you can treat it cash.

If you’re thinking of getting a loan, use our Loan calculator to work out how long it would take to pay it off and how much you’d need to repay each month.

You can also compare different rates and lengths of loan.

If you’re comparing loans online, make sure you check them on a few different comparison sites. Here are some suggestions:

  • Lovemoney
  • Moneyfacts
  • MoneySuperMarket

You may be offered payment protection insurance (PPI). Think carefully about whether you need this, and take a look at our Do you need payment protection insurance? to help you decide.

Once you’ve agreed with your bank, the loan will be in your account within a few days. You can then go to your car dealership to purchase your car.

Personal loans are repaid monthly. A payment schedule will be set up with your bank, so you’ll know exactly how much you’ll be repaying.

Loan protection

If you can pay some of the cost on a credit card you can benefit from section 75 protection. This can help you to resolve issues if you have them later as the credit card company will be jointly liable with the car dealer should anything go wrong.

Cooling off period and cancelling

Personal loans come with a cooling-off period from either the date you sign the loan agreement or from when you receive a copy of it – whichever is later.

A cooling-off period means you have 14 days to decide whether the loan is right for you, and if not, you can cancel it. It lets you withdraw from loans up to £60,260.

If you do cancel inside the cooling-off period, you’ll still owe the capital and interest that has built up over that time. You’ll need to repay this within 30 days.

Even if you cancel the loan, this doesn’t cancel your agreement to buy the car from the car dealership, so you’ll still need to find a way to pay for it.

Settling or paying off the loan early

You’ll need to write to your lender and ask for a settlement amount – the amount you need to repay to cover the loan in full.

Once they confirm this you’ll then have 28 days to pay off that amount. You should also get a rebate of any future interest and charges you have paid.

You can also ask for a partial loan settlement. This will make your loan smaller, and so will affect how you pay for the rest of your loan. The rebate you receive for any interest and charges will be less than if you pay off the whole loan.

When you contact your lender, they need to be clear about how you’ll repay the rest of your loan. You can negotiate, which might mean you pay the rest of the loan off in a shorter time, or pay smaller amounts each month.

Getting the best personal loan deal

  • Don’t just accept the first rate you are offered by your bank or building society.
  • Shop around to see which providers are offering the cheapest interest rates. Compare APRs, but keep in mind that a poor credit history could affect how much you can get. A comparison website can help you do this.
  • Get a quote from the lender before you apply. If they need to a credit reference search, make sure it’s a ‘quotation search’ or ‘soft search credit check’ which doesn’t leave a mark on your credit file.

Use our Loan calculator to find out how much your loan could cost.

What happens if you can’t afford to pay

You may be able to better control your personal loan, and you can find out more on How to reduce the cost of your personal loans.

If you’re struggling to meet household bills as well as your car payments, you can get free, confidential advice from a debt advice organisation or charity.

Find out where you can get free debt advice.

You could also:

Sell the car

Because you own the car, you can sell it and use the money to pay off as much of the loan as possible. This will significantly lower the amount you’d have to pay per month – and the number of months you’d need to keep paying – to pay the full loan back.

Talk to the finance company

They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.

Early repayment

You could also think about getting a settlement figure from your lender, which would be one final larger payment to end the agreement. You could be better off because you may be able to negotiate a price you can cope with. You can then keep the car or sell it.

If you’re having more serious money problems, get free debt advice.


Personal Loans: What to Know Before You Apply

Can I use a personal loan to buy a used car?

Credit comes in many forms, including credit cards, mortgages, automobile loans, purchase financing over time and personal loans. Each type of credit serves a certain purpose for a goal you may have, whether it's to buy a house or car, or to allow you to break up a big expense into more manageable monthly payments.

A personal loan is a form of credit that can help you make a big purchase or consolidate high-interest debts. Because personal loans typically have lower interest rates than credit cards, they can be used to consolidate multiple credit card debts into a single, lower-cost monthly payment.

Credit can be a powerful financial tool, but taking out any type of loan is a serious responsibility. Before you decide to apply for a personal loan, it's important to carefully consider the advantages and disadvantages that can affect your unique credit picture.

What is a Personal Loan?

When you apply for a personal loan, you ask to borrow a specific amount of money from a lending institution a bank or credit union.

While funds from a mortgage must be used to pay for a house and you'd get an auto loan to finance a car purchase, a personal loan can be used for a variety of purposes.

You may seek a personal loan to help pay education or medical expenses, to purchase a major household item such as a new furnace or appliance, or to consolidate debt.

Repaying a personal loan is different from repaying credit card debt. With a personal loan, you pay fixed-amount installments over a set period of time until the debt is completely repaid.

Before you apply for a personal loan, you should know some common loan terms, including:

  • Principal — This is the amount you borrow. For example, if you apply for a personal loan of $10,000, that amount is the principal. When the lender calculates the interest they'll charge you, they base their calculation on the principal you owe. As you continue to repay a personal loan, the principal amount decreases.
  • Interest — When you take out a personal loan, you agree to repay your debt with interest, which is essentially the lender's “charge” for allowing you to use their money, and repay it over time. You'll pay a monthly interest charge in addition to the portion of your payment that goes toward reducing the principal. Interest is usually expressed as a percentage rate.
  • APR — APR stands for “annual percentage rate.” When you take out any kind of loan, in addition to the interest, the lender will typically charge fees for making the loan. APR incorporates both your interest rate and any lender fees to give you a better picture of the actual cost of your loan. Comparing APRs is a good way to compare the affordability and value of different personal loans.
  • Term — The number of months you have to repay the loan is called the term. When a lender approves your personal loan application, they'll inform you of the interest rate and term they're offering.
  • Monthly payment — Every month during the term, you'll owe a monthly payment to the lender. This payment will include money toward paying down the principal of the amount you owe, as well as a portion of the total interest you'll owe over the life of the loan.
  • Unsecured loan — Personal loans are often unsecured loans, meaning you don't have to put up collateral for them. With a home or auto loan, the real property you're buying serves as collateral to the lender. A personal loan is typically only backed by the good credit standing of the borrower or cosigner. However, some lenders offer secured personal loans, which will require collateral, and could provide better rates than an unsecured loan.

How to Apply for a Personal Loan

Whenever you ask a lender for any kind of credit, you'll have to go through the application process.

However, before you submit a personal loan application, it's important to review your credit report and your credit score, so you'll understand what lenders might see when they pull your credit report and scores.

Remember, checking your own credit report never affects your credit scores, so you can check as often as you need.

Once you've reviewed your credit and taken any necessary steps what you see, you can apply for a personal loan through any financial institution such as a bank, credit union or online lender. Every lender you apply to will check your credit report and scores.

Lenders will usually consider your credit scores when reviewing your application, and a higher score generally qualifies you for better interest rates and loan terms on any loans you seek. The lender will also ly look at your debt-to-income ratio (DTI), a number that compares the total amount you owe every month with the total amount you earn.

To find your DTI, tally up your recurring monthly debt (including credit cards, mortgage, auto loan, student loan, etc.), and divide by your total gross monthly income (what you earn before taxes, withholdings and expenses). You'll get a decimal result that you convert into a percentage to arrive at your DTI.

Lenders to see DTIs under 36%, but many may provide loans to borrowers with higher ratios.

Minimize the Impact of Inquiries

When you apply for credit and a lender reviews your credit report, a hard inquiry is noted on your report. Hard inquiries remain on credit reports for two years, and their impact diminishes over time. However, in the short term, too many hard inquiries on your report can have a negative effect on your credit score.

If you'll be comparison shopping by applying to more than one lender, be sure to do so in a short time frame to minimize the impact of hard inquiries.

Generally, credit scoring models will count multiple hard inquiries for the same type of credit product as a single event as long as they occur in a short window of a few weeks.

Don't stretch your comparison shopping and applications over a period of months.

Another option is to ask if a lender can prescreen or preapprove you for a loan offer. Preapproval often counts as a soft inquiry, which doesn't affect credit scoring.

Pros and Cons of Personal Loans

any other type of credit, a personal loan has advantages and disadvantages, depending on your specific financial situation. Whether a loan is good for you will largely depend on how wisely you're managing your borrowing over time.

On the plus side, a personal loan can help you make a big purchase. Breaking a large expense into smaller payments over time can help make that cost more manageable when you have stable income.

Personal loans typically have interest rates that are lower than what you would pay for a credit card purchase.

A personal loan can also be a good way to consolidate multiple high-interest credit card debts into a single, lower-interest payment.

When you take out a personal loan and make on-time payments, you're helping to build a positive credit history for yourself, which contributes positively to many credit scoring calculations. Your responsible use of credit can positively impact many factors that credit scoring considers, including payment history, credit utilization ratio, and mix of credit types.

However, if you pay late or miss a payment altogether, that can negatively affect your credit. Late or missed payments can lower credit scores, and a lower credit score can limit your ability to get credit at better rates.

If you fall far behind on making loan payments, your personal loan may go into collections or be charged off — and both negative events appear on your credit reports and can also lower your credit scores.

Ultimately, if a personal loan makes it harder for you to pay all your bills on time, you may want to consider other options.

While not ideal, bankruptcy might be something to look into, but know it can appear on your credit report and negatively affect your credit for seven to ten years.

Personal Loans and Your Credit

It's important to manage any type of credit you use wisely, including a personal loan. Personal loans can be helpful when managed well, but taking on debt should never be something you do lightly – or without looking carefully at your overall financial picture before you pull the trigger.

Before you make any kind of important credit decision, it's best to check your credit report so you understand your current credit standing. Plus, reviewing your report can help you better understand how your decision may affect your credit in the future.


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