Can you use a personal loan to pay off your car?


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If you are looking to get out of car loan debt, you can use a personal loan to pay off your car. (iStock)

Many people turn to auto loans when purchasing a car. More than 85% of new car purchases and almost 37% of used car purchases were financed by a loan in the second quarter of 2020, according to the Experian State of the Automotive Finance Market report. Over time, however, buyers can decide their car loan terms are not ideal, forcing them to consider ways to pay off their car sooner than expected.

You can take out a personal loan to pay off your car, but that’s not always a good idea. Learn more about the factors to consider before using a personal loan to pay off your vehicle.

If you are looking for a personal loan, Credible allows you compare personal loan rates from multiple lenders in minutes.

Can you use a personal loan to pay off your car?

You can use the funds of a personal loan for almost any purpose.

Although you are generally not allowed to use a personal loan to fund illegal activities or to do things like gambling, they are also fairly open consumer products. This means that you can use a personal loan to pay off your car in most cases.

If you are considering using a personal loan to pay off a car loan, it is important to consider all of the factors involved. Here are some questions to ask:

  • What is the interest rate on your new personal loan? Auto loans are secured by your vehicle, so they usually have lower interest rates than unsecured products, such as personal loans.
  • Are there any fees? Some lenders charge a fee for granting (or opening) your new loan. If you don’t save more on interest than you spend on fees, your personal loan could cost you more than your car loan.
  • When will you get out of your debts? Even though a personal loan has a lower interest rate than your car loan, you can end up paying more interest over the course of that loan if you choose a longer repayment term. Make sure you consider how much your new loan would cost you overall.

The pros and cons of using a personal loan to pay off your car

There are both advantages and disadvantages of using a personal loan to pay off your car.

Benefits of using a personal loan to pay off your car

  • You may be able to get a lower interest rate. If you’re stuck on a car loan with a high interest rate, a personal loan can allow you to lower your APR while you finish paying off your car.
  • You may be able to lower your monthly loan payments. By hooking up a lower rate, adjusting the length of your loan, or both, you may be able to lower your monthly car payments with a personal loan.
  • You may be able to remove a co-signer. If you bought your car with a co-signer and now want to remove that person from your loan, taking out a new loan may transfer the financial responsibility entirely to you.

Disadvantages of using a personal loan to pay off your car

  • The origination fees can make personal loans more expensive. Not all personal lenders charge a set-up fee. But if yours does, that extra expense can mean your new debt will cost you more in the end.
  • Interest rates are often higher. Auto loans are secured by the vehicle you purchase, but personal loans are generally unsecured. Because you don’t have to post collateral, the interest rates for personal loans are often higher than those for auto loans.
  • You can pay more in the long run. When you take out a new personal loan, you can choose your repayment terms. If you choose a longer term than what is left on your current car loan, you could end up paying more total interest over the life of the loan than you would pay your car loan as expected, even though you get a low rate. ‘lower interest.

How to get a personal loan to pay off your car

If you choose to get a personal loan to pay off a vehicle, follow these steps to make sure your new loan is the most financially sound option for your situation.

  1. Check your credit. Checking your credit report before applying for a new loan helps you know where your credit score is and what kinds of loan terms might be available to you. It can also help you identify errors or fraudulent accounts that could affect your loan approval.
  2. Compare personal lenders. Shopping around for lenders helps you find the best loan rates and terms, and can help you decide which lender offers the loan you need.
  3. Apply for a loan. Once you have found a lender, it is time to apply for the loan. You will usually need to provide identifying information and documents, such as your address, phone number, or a copy of your ID, and you may also be asked to upload pay stubs or other proof of income. . The lender will take your income, current debt load, monthly expenses, and credit history into account when deciding whether or not to approve you for a loan.
  4. Pay off your auto loan. If you are approved, you will pay off your car loan balance with your personal loan funds. Ask your auto lender for a repayment quote for the most up-to-date balance information, and make sure you get written confirmation that the loan has been repaid. Once the loan is satisfied, your lender will release title to the vehicle to you.

With Credible you can compare personal loan rates in one place without affecting your credit score.

Do you have to take out a personal loan to repay your car?

Now you know you can use a personal loan to pay off your car… but should you?

This is an individual decision, but there are certain scenarios in which it may make sense to consider paying off an auto loan with a personal loan.

You will save on interest

If paying off your car loan with a personal loan reduced the total amount of interest paid, it might be worth considering. It could mean reducing your loan APR, shifting your repayment term, or both.

It’s important to calculate not only your monthly interest, but also your total interest over the life of the loan and any fees associated with your new loan. This way, you can determine if your personal loan will actually save you money.

You’re underwater on your car loan

Owning more on your car than it is worth (called negative equity or being “underwater” on the vehicle) is a dangerous situation. If your vehicle were to be stolen or totaled, insurance would only pay up to market value – if you owe the bank more than that, you’ll have to pay the difference immediately.

By repaying your car loan with a personal loan, you protect yourself from the disbursements associated with the unforeseen replacement of your vehicle. You will still owe more than the value of your car, but the loan will not be called due if the vehicle is stolen or totaled.

You are not eligible for an auto loan refinance

More auto loan refinance lenders have maximum loan-to-value (LTV) ratios that they accept. This means that they will only refinance your auto loan if you have a certain amount of equity accumulated in the vehicle.

If your LTV is too high, you might not be approved for refinancing. Instead, a personal loan can help you “refinance” yourself into a lower rate product, but without an LTV requirement.

Credible allows you compare personal loan rates from various lenders within minutes.

Other ways to prepay your auto loan

If using a personal loan to pay off your car isn’t right for you, here are some other ways you can prepay your car loan.

  • Round off your monthly payments. Paying a little more money for your auto loan each month will help you save money and get out of debt sooner. An easy way to do this is to round up your payments if you can.
  • Make a payment every two weeks. Making bi-weekly payments is another manageable way to pay extra on your loan without feeling so bad. By the end of the year, you will have made 13 full payments instead of 12.
  • Make a large additional payment each year. Whether you get a Christmas bonus or just have a few savings, making an extra payment each year can get you out of debt much faster. It will also reduce the total interest paid on your loan.


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