Should You Use a Personal Installment Loan To Buy a Car? (2024)

You can certainly use a personal installment loan to buy a vehicle. And in some cases, it would make more sense.

It is typically recommended to go for a personal installment loan rather than an auto loan if you’re credit is not good enough to qualify for the latter or if an auto loan is not an option for the vehicle that you have chosen.

However, you would have to consider a little more than these couple of factors before making up your mind. So, let’s dive deeper into the topic and take a closer look at all the possible situations.

Key Takeaways

Installment loans can be an effective option to finance the purchase of a car.
Personal installment loans are best used on used models of automobiles.
A personal installment loan may make more sense than an auto loan if your car purchase is for a model 10 years old.

Can You Use a Personal Installment Loan to Buy a Car?

Yes, you can use a personal installment loan to buy a car. Typically, installment loans are best for used automobiles.

It's not uncommon to find oneself in need of a car without the immediate availability of substantial funds. In such cases, turning to a loan is a practical solution. Whether it's for commuting to work, running errands, or simply enjoying the freedom of the open road, having a reliable vehicle is essential for many aspects of daily life.

With a personal installment loan, you can get the quick cash you need to purchase a car and repay it over time in manageable installments, making it a convenient and accessible choice for many. This financial flexibility is great because you can get that car right away without compromising financial stability.

Moreover, most personal installment loans are online personal installment loans, if you get our meaning. This means you don't have to sit in a bank office or fill out a paper application somewhere. You can simply grab your smartphone and get approved in a few minutes.

Reasons you can use an online installment loan for a car purchase

5 Reasons To Use a Personal Installment Loan to Buy a Used Car

Here are five reasons that you may want to use an online installment loan versus a car loan at your local dealership. Make sure you understand your loan offer and make comparisons to find the loan that fits your financial needs.

1. Financial Security

By opting for a loan instead of depleting your savings, you ensure that you have a financial safety net for unexpected emergencies, avoiding the risk of being stranded without funds for essential needs like gas.

2. Budget Flexibility

If you manage to make sure that your total debts do not account for more than 28% of your monthly gross income, you won’t experience any trouble with including the loan payments in your budget.

3. Immediate Access

With the loan approved online in advance and the funds in your account, you have instant access to make the purchase, avoiding delays or missed opportunities.

4. Shopping Around Is Easy

By exploring different rates, you can easily find a loan option that suits your financial situation, potentially saving you money over the long term.

5. You’ll be able to buy a safe and reliable car

At times, people who decide to pay for a car with cash end up going for a cheaper vehicle that is not in good working condition because it’s the only option they can afford. The funds that you’ll get access to with an installment loan will help make sure that you don’t neglect vehicle safety.

The Difference Between an Auto Loan and an Online Personal Installment Loan

The biggest difference between an auto loan and a personal installment loan is the fact that the former is used specifically for the purchase of a vehicle. You cannot spend the loan amount on anything else.

Furthermore, an auto loan is a secured loan that uses your vehicle as collateral. In case you fail to repay the loan, the lender will repossess the car.

Personal installment loans are generally unsecured, and you can use the money to buy any type of car you want (you might not get approved for an auto loan if you’re planning on purchasing an old car, for example).

Do bear in mind, however, that auto loans typically have longer repayment terms. That is because unsecured loans pose a higher risk for lenders. With that being said, there can be exceptions, so you should spend some time doing your research on the rates and terms offered by different lenders in your area.

Consideration	Auto Loan	Personal Installment Loan
Purpose	Specifically for purchasing a vehicle	Can be used for any purpose, including buying a car
Collateral	The vehicle being purchased serves as collateral	Generally unsecured, meaning no collateral is required
Vehicle Restrictions	Must be used to purchase a vehicle	Can be used to buy any type of vehicle, including old cars
Repayment Terms	Typically longer repayment terms	Repayment terms may vary, but are generally shorter compared to auto loans
Approval Considerations	Approval may depend on the type and condition of the vehicle	Approval is based on various factors, including credit history, income, and other financial factors
Risk Assessment	Lower risk for lenders due to collateral	Higher risk for lenders, as there is no collateral
Research	Important to research rates and terms offered by different lenders	Important to research rates and terms offered by different lenders to find the best option for your financial situation

When To Use an Online Personal Installment Loan To Buy a Used Car

There are a few situations when you might want to consider going for a personal installment loan to buy a vehicle.

1. Conventional Financing Is Not Available for the Car

An auto loan may simply not be an option for the car that you’re eyeing. This will typically happen with older vehicles that are over a decade old.

There is no set number on how old of a vehicle you can finance. You might find a lender that would be willing to give you an auto loan no matter how many years have passed since the car has been manufactured but make sure to pay extra attention to the terms of the loan in such a case.

However, in general, trustworthy financial institutions will not agree to finance auto loans for vehicles that are older than 10 years. So, in such a case, a personal installment loan might be the only option you’re left with.

2. Your Credit Is Not Good Enough for an Auto Loan

Though there isn’t a standard credit score that is required to qualify for an auto loan, a score of 661 and above might be able to get you a loan at a good rate. The minimum requirement is usually around 600.

If you’re planning on financing a new vehicle, the requirements might be a little harsher. In fact, for most new auto loans, borrowers have a score of around 730.

So, if your credit score is less-than-perfect, you may find it challenging to qualify for any auto loan. When it comes to online installment loans, the requirements are typically a little lower.

3. Your Personal Installment Loan Has Better Terms Than an Auto Loan

The rates for unsecured installment loans tend to be higher, but there are cases in which you might end up qualifying for a competitive offer.

By shopping around and finding out more about the terms of different loans from various lenders, you can make an informed and cost-effective decision. And there is a chance that for your specific case, an installment loan would be a better option.

Benefits of Using a Personal Installment Loan for a Used Car

There are quite a few advantages to financing the purchase of a used vehicle with a personal installment loan. This type of loan provides a lump sum that should be paid off over time in equal monthly payments.

This is certainly a convenient way to take care of your debt as you’ll get to plan the monthly payments and incorporate them into your budget without making huge adjustments to your daily life.

Pros of Financing a Car with a Personal Installment Loan

The loan would most likely be unsecured. This means that you wouldn’t have to put up any form of collateral (in the case of an auto loan your car is securing the loan). And though the lender can pursue you in court, if you fail to meet your financial obligations, the risk of repossession will be lower.
A personal loan is less restrictive. Just as the name suggests, the amount that you’ll get from a personal loan can be used to take care of practically any personal matter, and funding a car is just one of the options. With an auto loan, you won’t have that much freedom. Furthermore, lenders would typically require you to make up your mind about what vehicle you want to buy before applying for a loan.
- With a personal loan, you can select the vehicle after getting your hands on the funds, and you can choose a car that an auto loan lender might not have approved of (for example, one that is over 10 years old).

You wouldn’t have to take care of the down payment. Some auto loan lenders would require a down payment of about 20% for new cars and 10% for used cars. And though a down payment can make it easier to get approved and you’ll be less likely to have negative equity, not everyone has a few thousand dollars lying around that they can use to put down on a car. A personal loan helps avoid making such a payment.

Cons of Financing a Car with a Personal Loan

There are also a few disadvantages of taking out a personal loan to finance the purchase of a vehicle that every potential borrower should be aware of.

The loan might end up being quite expensive. How much you’re going to pay in total would depend on a lot of factors, but you might spend more money on a personal installment loan than you would have on an auto loan. With that being said, you wouldn’t be required to carry full coverage car insurance (like in the case of an auto loan), so at least you’ll get to save money on that.
You might be required to pay off the loan faster. Unsecured personal loans are riskier for lenders and that’s exactly why most of the companies would be willing to offer you only a short repayment timeline. You might be given only a few months to fully repay the loan which might be difficult to do for some.
You might not be able to get access to a large amount. The loan amount that you will be offered by the lender would depend on plenty of conditions. But, in a lot of cases, the sum proposed will not be higher than what you could have gotten with an auto loan. As the latter has been designed to serve a specific purpose, the amount that you will get if you qualify is quite big.
- The average auto loan amounts for used vehicles are nearly $24,000 at the moment. When taking out a personal loan, borrowers can typically expect to receive around $7,700. Though this can be enough to fund some vehicles, your choice would be limited.

Going for an auto loan to fund the purchase of a vehicle is not always the most cost-effective decision. In some cases, a personal installment loan can be a better choice.

If you cannot meet the requirements of the lender to take out an auto loan (for example, your credit score is too low) or if you want to use the money to buy and restore an old vehicle (some lenders won’t finance cars that are over 10 years old), an online personal installment loan might be your only option.

There can also be instances when a personal loan lender would offer you more favorable conditions. So, going for a personal loan in such a case would simply make more sense financially.

Before making up your mind, make sure to spend some time shopping around and crunching the numbers. After you consider all the factors, including the overall cost of the loan, the repayment timeline, and loan limitations, you will be able to make the best possible decision for your specific case.

How To Choose a Car Loan

Whether it's a personal loan or not, selecting the best car loan comes down to research, planning, and a little negotiating skills at the dealership.

No matter what new car you have your eye on -- an adventurous Jeep or a hot new Tesla -- you are going to need to pay for that new ride. Car loans are the most common way to afford the increasing price of a new or even a used car. In the past year, the average MSRP for a new car has risen by $904, according to an independent analysis done by iSeeCars.

So, you must research the car that fits your needs, do a little haggling at the dealership, and find a lender who is giving you a competitive rate.

Should You Get a Car Loan?

You may not want to but you have to. Sound about right? While taking out a car loan is a valid concern, the answer to this question is probably linked to other important worries that every American faces like: "How will I drive to work today?" and "Who is going to pick the kids up from school?" So, I am sure most Americans understand that a car is a depreciating asset and that you may end being still paying for a car in a few years that has lost a lot of value, but you have to get around, right?

If you are someone who has $30,000 liquid in cash, consider yourself blessed. If not, an auto loan is a necessary evil. Like it or not. Still, you can be smart about it. For instance, using a loan to buy an expensive car you cannot afford is not wise. Just because a loan enables you to purchase a brand-new car does not necessarily mean that you should go for it.

It is important to know all of this information before you go in to negotiate a loan because what you can afford and what a dealership will say you can afford are two very different things most of the time! So, what can you do to ensure you are getting the best deal?

How To Compare Auto Loan Offers

First, before you go to the dealership, secure a pre-approval on your car loan. This will give you a limit on how much you can spend, and it will remove any anxiety about if you will be approved. Another advantage is that you will have more power while negotiating at a dealership, which will, in turn, protect you from marked-up rates.

So, when comparing auto loan offers, it's essential to look beyond the monthly payment. Here's how you can compare them effectively:

Total loan amount. Look at the total amount you will repay over the life of the loan, including interest and fees. A lower total loan amount means you pay less overall.
Interest rate. Compare the interest rates offered by different lenders. A lower interest rate can save you money over time.
Loan term. Consider the length of the loan. Shorter loan terms typically have higher monthly payments but lower overall interest costs.
Additional costs. Check for any additional fees or charges, such as origination fees or prepayment penalties. These can add to the cost of the loan.
Online tools. Use online tools and calculators to compare offers side by side. These tools can help you see the total cost of each loan and choose the most affordable option.
Budget and financial goals. Choose the option that best fits your budget and financial goals. Consider how much you can afford to pay each month and how quickly you want to pay off the loan.

By comparing auto loan offers based on these factors, you can find the best loan for your needs and save money in the long run.

Steps for Getting the Best Car Loan

OK, so you are going for it. Let's back up. Here are the steps you should take.

Determine your budget and credit score. Knowing how much you can afford and understanding your creditworthiness can help you negotiate better loan terms.
Apply for preapproval and shop your existing car. Getting pre-approved for a loan can give you a competitive edge when negotiating with dealerships. In addition, start shopping around for the best trade-in value for your current vehicle (if you have one).
Compare quotes. Compare loan offers based on the total loan amount, interest rate, and any additional fees.
Use your loan offers to set a budget. Once you have loan offers, use them to set a budget for your car purchase.
Haggle and negotiate when you can. Most dealers will mark up cars with extra fees and add-ons. If you see extra fees, we recommend starting there to reduce some low-hanging fruit from your overall out-the-door costs.
Finalize your auto loan. Once you've found the right loan, finalize the paperwork and get ready to drive off in your new car!

Additional Tips for Comparing Car Loans

There is a lot to know about buying a car. Here are some additional tricks to keep the process under control.

Understand the Impact of Loan Length on Total Costs

The length of your loan can significantly impact the total amount you pay for your car. While longer loan terms may result in lower monthly payments, they can also lead to higher overall costs due to interest.

On the other hand, shorter loan terms may have higher monthly payments but can save you money in the long run by reducing interest charges. Consider your financial situation and goals when choosing a loan term.

Your Credit Score Will Impact Your Car Loan

This will differ depending on who offers you a loan. Dealerships will often advertise the best interest rates on their cars, so you shouldn’t assume you will get those if you don’t have perfect credit (buyers with a FICO score of 750 or higher).

If you have a credit score in the low 700s, you will still get a pretty good interest rate but might not qualify for some of their promotions. If you have below-average credit scores of 650 and below, you may get a car loan rate of 10% or even more.

If you have a very low credit score, you must shop around to ensure that you are getting the best rate available to you.

You will still probably have to pay more than someone with good credit, but you do not have to settle on the first rate you receive.

Know How Much To Put Down

You should always try to put down about 20% of your car’s worth. This seems like an easy decision, but many dealerships won’t even require it for people with good credit.

This is risky, especially as time passes and you find yourself owing more for the car than it’s worth. If you need to sell your car suddenly, you may come out of it still owing money. If you put down a payment, this can be avoided.

Can You Use a Personal Installment Loan To Buy a Car?