You can use a personal loan to buy a car, but typically an unsecured personal loan does not offer an interest rate as low as what you could get with a secured auto loan. Car loans are secured by the vehicle, as the lender takes a lien against the vehicle. This means if you default on the loan, the lender can repossess the car as collateral.
Car Loan Basics
Car loans are financing used to purchase a vehicle. Vehicles are one of the most valuable assets people typically buy. Similar to purchasing a home, when you get financing for a car purchase, you award the lender conditional ownership in exchange for necessary purchase funds. Because they are secured, auto loan rates are typically lower than most other loans you get besides home loans. Thus, using a personal loan to buy a car makes little sense if the rate is a few percentage points higher.
Another Option
While using regular loans to buy cars may not make sense, using a home equity loan to buy a car sometimes does. A home equity loan, or line of credit, is secured by your property, which means interest rates are typically much lower than rates for unsecured loans. Home equity financing is often less expensive than auto loans. If you have access to equity, you might benefit by comparing the rates available with home equity and auto financing. The risk of home equity financing is that you are taking on more risk of loss for your home.
Shopping for Car Loans
If you are going to shop for a regular auto loan, shop around before going to a dealership to buy a car. Dealers notoriously work with lenders and try to get you into financing to make an immediate sale. Eric Peter of AOL Autos advises all car buyers to compare loan options before going to a dealer. Sometimes, your home lender or other banks you have relationships with offer good rates based on your existing accounts with them. Lining up financing in advance helps you avoid some of the pressure tactics commonly used by car dealership finance managers.
Other Considerations
Another reason to consider your loan options, whether personal, equity or auto, in advance is to understand all of the costs associated with buying a car. Consumers who wait until they pick out a car to sit down with a finance manager are often surprised to learn about all the extra costs of buying a car. Many states have sales tax on cars. You also have to pay for titling and registration. Plus, some business finance managers try to add on expensive gap insurance premiums and attempt to sell you extended warranties. Reviewing these options and costs up front helps you avoid surprise after you have committed to a car purchase.
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