If you’re buying a car but can’t use cash for the full purchase price, you’ll have to explore financing. Many buyers take out an auto loan – also called a car loan – to finance their car, but that’s not the only option.
You can use a personal loan to pay for a variety of expenses, including a car. Here, we’ll look at the difference between personal loans and auto loans and the circumstances under which you might use a personal loan to buy a car.
Personal loan vs. auto loan
Let’s look at the key differences between personal loans and auto loans:
- Secured vs. unsecured: An auto loan is secured by the car you're buying, which acts as collateral. If you default on the loan, the lender can repossess the vehicle. A personal loan is unsecured, which means no collateral is required.
- Interest rates: Auto loans are secured by the car, so they tend to come with lower interest rates compared to personal loans. This can make them more affordable.
- Loan terms: Repayment terms are similar for most personal and auto loans. Citi offers personal loan repayment terms of up to 5 years. Auto loan terms generally range from 2 to 7 years.
- Amount borrowed: The amount you can borrow with an auto loan is usually tied to the value of the car. Personal loans, however, may have more flexibility. The maximum loan amount can depend on the lender and your creditworthiness.
- Down payment: You can make a down payment on an auto loan to reduce the amount borrowed (in some cases, a down payment may be required). With a personal loan, you can borrow what you need or use a combination of savings and a loan to pay for the car.
Reasons to use a personal loan to buy a car
While auto loans, when available, usually make the most sense for financing a car, there are situations where a personal loan might be the right choice:
Auto loans aren’t available
If you’re buying a car from a private seller rather than a dealership, you may not have access to an auto loan. Some dealers won’t offer financing for older cars or cars with higher mileage. In these cases, a personal loan can provide the financing you need.
You qualify for a lower rate with a personal loan
In rare cases, you may be able to secure a lower interest rate with a personal loan than with an auto loan. This can happen if you have excellent credit and find a lender offering competitive rates.
You don’t want to make a down payment
Auto loans sometimes require a down payment, but personal loans do not. If you’d prefer to finance the entire purchase without putting money down, a personal loan could be a good option.
Drawbacks of using a personal loan to buy a car
There are a few drawbacks to using a personal loan to finance a car:
- Potentially higher interest rates: Personal loans typically come with higher interest rates than auto loans because they’re unsecured. Depending on the term, it could cost more to borrow the same amount.
- Shorter terms: Since personal loans can have shorter repayment periods than auto loans, your monthly payments may be higher compared to an auto loan.
Deciding whether financing a car with a personal loan is right for you
In most cases, using an auto loan to finance makes the most sense. Auto loans tend to offer lower interest rates, longer repayment terms and the ability to borrow based on the car’s value. However, a personal loan might make sense in specific circumstances, such as if you’re buying from a private seller, don’t want to make a down payment or qualify for a better rate.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.