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You can use personal loan funds for any purpose. Read on to see if that means you can put that money toward a car.
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Buying a car is hardly an inexpensive prospect these days — especially if you’re looking to buy a new one. The average transaction price of a new vehicle was $48,008 in March, according to Cox Automotive.
But even if you’re buying a used car, you may not have the money in your savings account to pay for it in full on the spot. As such, you may have no choice but to borrow money and pay off your car over time.
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Now, you may be inclined to take out a personal loan to cover your car purchase. But is that even allowed? The technical answer is yes. But whether it makes sense to take out a personal loan to buy a car is a whole different story.
An auto loan could make more sense
The nice thing about personal loans is that you can use your proceeds for any purpose. Want to finance a home renovation? A personal loan could help you do that. Looking to start a business? You can use the money you get from a personal loan to cover your start-up expenses.
Because personal loans generally don’t put restrictions on how you can use your proceeds, it’s technically possible to use one of these loans to buy a car. But that’s also not necessarily the best bet.
It’s true that personal loans can come with competitive interest rates. But if you shop around for an auto loan, you may find that you’re able to snag an even lower interest rate on one. Also, in some cases, you might have an easier time qualifying for an auto loan than a personal loan.
See, personal loans are unsecured, which means they’re not tied to a specific asset. With an auto loan, your loan is secured by the vehicle you’re borrowing money to purchase. This means that if you fall behind on your loan payments, your lender could repossess your car if need be to get repaid.
With a personal loan, it can be harder for a lender to recoup its money if you stop making payments. That’s why an auto loan may be an easier one to snag — especially if your credit score doesn’t happen to be the best.
Be careful with a personal loan
The fact that personal loans are so flexible can be both good and bad. On the one hand, it’s nice to be able to apply for a single loan and use your proceeds to, say, fix up your home and car if you have both needs.
But the flexibility that comes with personal loans might lead you to borrow money for the wrong reasons. You shouldn’t, for example, put yourself in debt to take a vacation. But if you’re tempted to sign a personal loan so you can travel, you might land in that very boat.
Now, a car is hardly a frivolous purchase. Chances are, you need one to function and get to your job. So using the proceeds from a personal loan to buy one isn’t necessarily a terrible choice. It may just be that taking out an auto loan is a more cost-effective way to finance a vehicle purchase.
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