How to Finance a Car With a Personal Loan

You have more than just your eye on that shiny new set of wheels at the local car lot. You’ve already been in to test drive it three times and you’re convinced that you and it are made for each other.

Now all you need to do is strike a deal with the dealer, get approved for an auto loan, and drive off into the sunset.

Imagine the disappointment when you get declined for financing; first, through the dealer, then through the bank.

Your credit may not be good enough, or you don’t meet the income requirements, and you can’t afford to buy the car with cash.

If dealership financing isn’t available, one option is seeking a personal loan. But is it the right decision to make in lieu of a conventional loan?

How Personal Loans Are Used for Auto Financing

A personal loan is a loan offered to consumers to use for personal reasons.

Because it’s personal, borrowers are given a lot of flexibility what they can use their funds for.

You might take out a personal loan to pay for anything from a major home improvement, to bolstering your emergency savings, even for financing a car.

Loan amounts depend on your credit

Personal loans typically range from about $1,000 to $50,000, but the amount you borrow all depends on how much you need, and what you can get approved for, taking into account things like your income, your credit score, and the time you agree to repay the loan.

For instance, the better your credit score (say 700 and above for prime borrowers), combined with a higher income lowers your risk to lenders and tells them that you’re creditworthy enough to pay the loan and obtain a lower interest rate.

Your debt-to-income ratio is important to lenders, who want to see that your debt doesn’t outweigh your monthly earnings. Aim to make your debt payments no higher than 43 percent of your income.

Personal loans can be secured and unsecured

Personal loans can be either secured or unsecured, and whichever you choose depends a lot on the interest rate and repayment terms you may sign up for.

A secured personal loan requires some form of collateral you’d pledge for security, to protect the lender in the event the borrower defaults on the loan.

The lender then reserves the right to keep the collateral and resell it to a future borrower to compensate for the loss.

A secured personal loan requires some form of collateral you’d pledge for security, to protect the lender in the event the borrower defaults on the loan.

The lender then reserves the right to keep the collateral and resell it to a future borrower to compensate for the loss.

Personal Loan Calculator

Personal Loans vs. Auto Loans

A secured personal loan is similar to a traditional auto loan, backed by the collateral of the car the borrower is buying. Stop making your car payments, and your car can get repossessed.

Unsecured personal loans don’t require collateral, so to protect against the risk of default, the lender may charge higher interest rates and fees.

Compared to the lower rates we tend to associate with car loans, a personal loan may seem like an unaffordable choice. But it could be the wise choice if you don’t qualify for an auto loan, helping you get the car you want, pay it off and build your credit at the same time.

When personal loans are better

Interest rates on personal loans tend to be on the high side. Personal loan APRs can be significantly higher than APRs on auto loans.

However, if your credit errs on the average to poor side, and the need for a car is a priority, taking out a personal loan at a higher rate versus being declined for auto financing can work in your favor, since it could allow you to raise your credit and refinance the loan down the line for a lower interest rate.

Personal loans and auto loans are alike in a few ways. Loan terms are similar (usually ranging from about 24 to 60 months), and funds are available as soon as you sign on the dotted line.

One thing to watch out for apart from interest rates are possible origination fees attached to personal loans.

Usually no more than 2 percent of the loan balance, it may not seem like much, but the more expensive your loan, the more expensive the fee. (For instance, a $15,000 personal loan in place of a car loan may come with a $300 fee.

Where to Find Personal Loans

Another benefit to personal loans: they can be found almost anywhere through most major banks, credit unions, and online and peer-to-peer lending outlets. Some financial providers you can find personal loans with include:

How to Get Approved for a Personal Loan

Getting approved for a personal loan isn’t so much about how well you qualify -- but what information you provide your prospective lender.

Omit or forget certain documents or info, and your loan application could get held up or declined … and if it’s a car you’re borrowing for, it could mean losing out on a limited time or special pricing offer.

Thankfully, there’s not a whole lot you need to fill out and submit in a personal loan application. Here’s what you need:

Personal ID

You may need to provide a driver’s license, birth certificate, current passport, or Social Security card. They should include your date of birth, and in some cases, your mother’s maiden name.

Proof of current address

A cable or utility bill, rent or mortgage statement, a certified document from your HOA or landlord, etc. For application purposes, you may also be asked to provide your previous addresses, plus your employer’s address and contact information.

Proof of current/past earnings

Documentation may include pay stubs, tax forms or bank statements.

Recent debt/credit accounts

How many credit cards, auto or mortgage loans, student loans or other lines of credit do you have? Checking your credit report for a complete history will help you gather up the information you need without leaving any previous accounts out.

How to Increase Your Chances of Approval

While no magic formula or fast track to getting approved for any loan exists, the best odds to increasing your chances of personal loan approval rests on one person: You.

Like a fitness regimen or strict diet plan, it’s all about keeping your finances in check and practicing good financial habits:

Get your credit score in shape

If you fail to qualify for a new loan, don’t worry. Concentrate on the credit accounts you do have.

Whether it’s a credit card, a student loan payment or some other debt, pay your bills in full, on time, and maintain a good credit utilization ratio (no more than one-third of your available credit).

An excellent credit score tells lenders you can be trusted to repay the money you borrow.

Shop around

There are plenty of fish in the sea, and that goes for lenders, too. Where one bank or financial provider may deny you credit or a loan, another might be happy to work with you.

Look at P2P lenders, where the peer, community-based atmosphere may be more loan friendly than that of a big name bank.

Better your budget

Even the most airtight, fixed budgets have the chance for some wiggle room. Are there ways to generate more income, or reduce your expenses, for a larger loan down payment -- or better yet, to borrow less from a personal loan?

Make diligent use of budgeting apps and spreadsheets to figure out your money going in and going out; look for a side hustle for extra cash; and use the opportunity to shop with coupons and during sales to save money, to name a few.

Conclusion

One more car-related pun: Getting a personal loan instead of a traditional loan can put you in the driver’s seat of a car -- and your finances -- when conventional funding isn’t readily available.

By shopping around, from the right car dealer to the right personal lender, you’ll find the right mix of price, interest rate, loan balance and terms that suit you and your finances and make your dream ride the most affordable you can find.

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