Can You Use a Personal Loan to Buy a Car?

Many car buyers rely on loans to finance their new vehicle, and many use auto loans—but you can use a personal loan to buy a car, too. After all, buying a car is expensive. If you don’t have enough cash on hand to buy a new car or one that’s new to you, you need a loan.

There are some key differences between auto loans and personal loans. Which type of loan is better for you will depend on your specific situation. So even if it made sense for your friend to use a car loan, it might make more sense for you to use a personal loan to buy a car.

Read on to learn the differences between these types of loans.

How do I use a personal loan to buy a car?

You can use a personal loan to buy just about anything, including a car. They give a borrower a lot of flexibility. With a personal loan, you're not tied to the purchase of a specific car. You can apply for a loan based on your target price as you begin the hunt for the perfect car. With a personal loan, you're free to buy a car from anyone you like—whether it’s a car dealer, an auto auction or a private seller. You're also free to shop around for the best interest rates and loan terms rather than being tied into the terms offered by a dealership.

A personal loan can give you more control over how you spend the money. For example, if you find a car that costs less than the amount of your personal loan, you are free to spend anything left over on something else. You could use it to pay off high-interest-rate credit card debt or use it to pay for your car insurance. You could also pay it back into your personal loan which may reduce the amount of interest you pay overall. The process of getting a personal loan is the same regardless of what you plan to use it for. At TD Bank, you can  see your personal loan rate options and apply online.

Secured and unsecured personal loans

The vast majority of personal loans are unsecured loans. These loans do not require collateral, or something of value attached to the loan. If a borrower defaults on a secured loan, the lender can take the collateral. Lenders may offer better interest rates for secured loans, because the collateral reduces the risk of them winding up with nothing if the borrower defaults.

Before deciding whether to approve your loan application and, if so, which terms to offer, the lender might look at a number of items, including your credit score, credit report, bank accounts and other expenses. The better your credit score, the lower your interest rate may be.

If you have a low credit score, lenders might approve a smaller loan than you want. They also might loan you money for a shorter period than you would like.

At TD Bank, you can check to see what terms you might receive. Factors for borrowers to consider include interest rate, fees, length of loan and dollar amount. Prequalifying does not affect your credit score, because the lenders use only a soft credit check.

How do I get an auto loan to buy a car?

 Some buyers find it convenient to work with the auto dealer on financing. Those types of loans are indirect auto loans, because the loan is obtained through the dealer in partnership with the lender.

A borrower can use an auto loan only to buy a specific vehicle. Unlike unsecured personal loans, car loans are always secured. The car you buy is the collateral. This is one reason that auto loans usually come with lower interest rates than personal loans. The downside is that if you default on the loan the auto lender will repossess your car.

When financing through the dealer, you apply for an auto loan at the car dealer as you are buying your car. Car dealers often try to get buyers to focus on the monthly payment. Then they combine the trade-in value, sale price of the vehicle, add-ons like special car mats and features packages, and the loan. They can stretch out the term of the loan to get you the monthly payment you want, but at a greater overall expense to you. Some lenders offer secured auto loans directly to the borrower, also known as direct auto loans. Similar to indirect auto loans, the vehicle will be collateral for the loan. The main difference between an indirect and direct auto loan is the borrower is not limited to a particular dealership when using a direct auto loan. They can go to any dealership of their choice and know their buying power prior to shopping for a new vehicle.

On the positive side, you might obtain as big a loan as you need to buy the car. And dealer financing offers qualified buyers the option of stretching out the loan over time so they can lower their monthly payments. Also, auto lenders sometimes offer special financing deals, especially to people with excellent credit scores.

TD Bank doesn’t offer dedicated auto loans that are direct to consumers and secured by the vehicle, although TD Bank does do indirect auto financing through dealerships.

Line up a second option for a loan

It pays to line up an alternative loan before heading to a car dealer. Prequalifying for a personal loan or for an auto loan directly from a bank, credit union or online lender allows you to put aside talk about the loan payments and negotiate on the actual price of the car. Once that is settled, you can talk about whether the dealer can offer you better financing terms.

Personal loan vs. auto loan

Let’s compare personal loans and auto loans.

Secured or unsecured

Car loans are secured, with the car being the collateral. Personal loans tend to be unsecured. If you have trouble repaying a personal loan, the lender can’t take the car. However, the borrower might face other consequences for failing to repay the loan as agreed.

Interest rates

Interest rates tend to be lower for auto loans, possibly because they are secured by using the car as collateral. However, it’s important to compare the entire cost of the loan, which includes fees and the interest paid over the length of the loan. Start by comparing the APR, or annual percentage rate, and dig deeper.

Fees

Many but not all personal loans have origination fees. They also might have application fees, prepayment fees, returned check fees and the option to buy payment protection insurance and add that to your monthly payment.

View TD Bank's personal loan terms. (Florida residents may also pay a document stamp fee.)

Car dealers add several fees and also offer services that may increase your loan amount above the price of the vehicle. Some may be negotiable. Some are options you can decline or pay up front to avoid paying interest on them for the life of the loan. Be on the lookout for these: origination fee, prepayment fee, destination fee, documentation fee, advertising fee, dealer prep fee, GAP insurance (which covers the difference between what your car is worth and what your car insurance covers if the car is totaled), extended vehicle warranty and credit insurance protection.

The APR is useful for comparing loan offers, but it pays to know ahead of time what fees might be added to a loan.

Amount of loan you can get

With an auto loan, you can borrow up to the amount you need to buy a specific car. You also have the option of using a down payment to reduce the amount you borrow.

With a personal loan, you can borrow as much as the lender offers, but you don’t have to borrow that full amount. However, the lender might agree to lend you less than the car you want costs. You’ll have to come up with the money some other way or choose a less expensive car.

Length of a loan

Most car loans are fixed to be paid off in 36, 48, 60, 72 or even 84 months. Lenders set the time period, or term, for a personal loan in months, too, but sometimes are for shorter periods than car loans. TD Bank offers personal loans for 36-60 months. The longer term may give you lower monthly payments but may mean paying more in total interest.

When does a personal loan for a car work best?

Using a personal loan to finance a car may make a lot of sense for car buyers under certain circumstances.

You are buying from a private seller

If you shop carefully, your best chance to get the most car for your money might come from a private seller. In that case, an auto loan through a dealer is out. And the seller might not want to finance the purchase, preferring to receive the full price. A personal loan may be the logical choice.

You don't want a lien on your car title

Auto loans require that you put your car up as collateral. This means when you drive off the lot the lender has a lien, or security interest in your vehicle. The lien is what protects the lender in the event a borrower fails to repay the loan as agreed. It gives them the right to take possession of the collateral to reduce any losses as a result of a defaulted loan. Also, until the loan has been paid off, the lender usually has possession of the title for safekeeping. You might not get possession of the title to your car until your loan is completely paid off. If you use a personal loan to finance your car purchase, you drive off with a clear title on the car.

You would like to avoid hefty fees

Many dealerships add their own fees on top of standard loan fees. That’s because they may be working through either a “captive finance” company, which is owned by the car maker, or a lender that the dealer has an arrangement with. In either case, the dealer may mix in financing fees with its other fees. Many personal loans come with just a simple origination fee. View TD Bank's personal loan terms.

You are buying a car that other lenders won’t accept

Sometimes the price of a used car is low enough that lenders don’t think they will make enough money from a corresponding loan to make it worth their while. Or you might want to buy a car that’s a bit of a project. You might picture an old muscle car purring down the road someday in all its restored glory. But a lender looks at it as a vehicle that doesn't provide enough security on the loan in relation to the loan risk. As collateral, neither type of car is of value to the lender. An unsecured personal loan allows you to use the money for almost any consumer purpose you like.

Finding the right loan

Buying a new car is exciting. Figuring out how to finance your next auto purchase does not need to be complex or overwhelming. Check with TD Bank or visit your nearest branch to discuss your options with a loan expert.