Does It Make Sense to Buy a Car With a Personal Loan?

The average price of a new car was $48,008 in March 2023, which is a pretty substantial sum of money. Both new and used cars are expensive, and many people need to borrow for them rather than paying for them directly from their savings account. 

If you're borrowing to buy a car, you may be interested in potentially using a personal loan. Personal loans are offered by many banks, brokerage firms, and online lenders. The proceeds from them can be used for anything you want -- including a vehicle purchase.

But, does it actually make sense to use a personal loan to fund your new car? Here's what you need to know to decide.

There's a better option than buying a car with a personal loan

While personal loans can be a great way to borrow in some circumstances, it typically makes no sense to use one to buy a car. Car loans are specifically designed to get you into a vehicle and they can be a far better choice.

See, car loans are secured by the car, which acts as collateral. A dealer can help you get a car loan or you can apply on your own with a lender of your choosing. Since car loans are secured, they don't present a whole lot of risk for a lender since the lender could just repossess the car if you stop paying the loan. 

Car loans aren't as risky for lenders, so they are much easier to get approved for -- even for people with bad credit in many cases. The interest rate is also pretty low relative to personal loans. The average car loan interest rate in 2022 was 6.07%, for example, while personal loan rates averaged 11.48% as of May 2023. 

Since a higher interest rate adds costs, a personal loan would be a more expensive way to borrow for a vehicle than a car loan would -- and you might also have a harder time finding a lender to give you a personal loan, compared to getting a car loan.  

For both of these reasons, you're likely better off shopping around for the best car loan you can qualify for -- as using a personal loan would be the wrong financial move. 

Be smart about how much you borrow for a car

Although a car loan can be more affordable than a personal loan, borrowing for a car can mean making a major financial commitment for years to come. And, since cars go down in value over time, it means paying interest for an asset that becomes worth a little less each day. 

Now, you may still need to borrow for a car despite these downsides. Just try to borrow the minimum you need to get a safe vehicle, and choose a car loan with as short of a payoff timeline as you can afford. That way, you'll keep your car payments reasonable and should have money left over to accomplish other financial goals like saving for your future.