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Many people turn to car loans when buying a car. More than 85% of new car purchases and almost 37% of used car purchases were financed by loans in the second quarter of 2020, according to the Experian State of the Automotive Finance Market report. Over time, however, buyers may decide that their car loan terms are not ideal, leaving them to consider ways to repay their car sooner.
You can take out a personal loan to pay for your car, but it is not always a good idea. Learn more about the factors to consider before using a personal loan to repay your vehicle.
If you are looking for a personal loan, Credible lets you compare personal loan rates from many lenders in minutes.
Can you use a personal loan to repay your car?
You can use the funds from a personal loan for almost any purpose.
While generally not allowed use a personal loan to fund illegal activities or do things like gambling, otherwise they are quite open consumer products. This means that you can use a personal loan to repay 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 the factors involved. Here are some questions to ask:
- What is the interest rate on your new personal loan? Car loans are secured by your vehicle, so they usually have lower interest rates than unsecured products, such as personal loans.
- Are there any charges? Some lenders charge commissions to create (or open) your new loan. If you do not save more on interest than you spend on commissions, your personal loan may cost you more than your car loan.
- When will you get out of debt? Even if a personal loan has a lower interest rate than your auto loan, you may end up paying more interest on the loan if you choose to repay it longer. Be sure to think about how much your new loan will cost you in total.
Advantages and disadvantages of using a personal loan to repay your car
Using a personal loan to pay off your car has both advantages and disadvantages.
Advantages of using a personal loan to repay your car
- You may be able to get a lower interest rate. If you are locked in a car loan with a high interest rate, a personal loan can allow you to reduce your APR while repaying your car.
- You may be able to reduce your monthly loan payments. By applying a lower interest rate, adjusting the duration of your loan, or both, you may be able to reduce 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, getting a new loan can completely shift the financial responsibility to you.
Disadvantages of using a personal loan to repay your car
- Origin fees can make personal loans more expensive. Not all personal loan lenders charge commissions. But if you make it your own, this extra expense may mean that your new debt is costing you more in the end.
- Interest rates are often higher. Car loans are secured by the vehicle you buy, but personal loans are usually unsecured. Since you do not need to provide collateral, interest rates on personal loans are often higher than car loans.
- You may 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 your current car loan, you may end up paying more total interest over the life of the loan than you would on your car loan as planned – even if you get a lower interest rate. .
If you choose to take out a personal loan to pay off a vehicle, follow these steps to ensure that your new loan is the most financially sound option for your situation.
- Check your credit. Check your credit report Before applying for a new loan, it helps to know where your credit score is and what kind of loan terms can be offered to you. It can also help you identify bugs or fraudulent accounts that could affect your loan approval.
- Compare Personal Loan Lenders. Shopping for Lenders Helps You Find the Best Interest Rates and Loan Terms and Can Help Decide which lender offers the loan you need.
- Apply for a loan. Once you have found a lender, it is time to apply for a loan. You will usually need to provide identification and documents, such as your address, telephone number, or a copy of your ID, and you may also be asked to provide payment or other proof of income. The lender will look at your income, current debt burden, monthly expenses and credit history when deciding whether to approve you for a loan.
- Repay your car loan. If approved, you will repay the balance of your auto loan with your personal loan funds. Ask your mortgage lender for a quote to get the most up-to-date balance information, and be sure to get written confirmation that the loan has been repaid. Once the loan is repaid, your lender will release your vehicle title.
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 pay off 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 some scenarios where it may make sense to consider repaying a car loan with a personal loan.
You will save interest
If repaying your car loan with a personal loan would reduce your total interest rate, it might be worth considering. This could mean a reduction in the APR of your loan, a change in your repayment period, or both.
It is important to consider not only the monthly interest rate but also your overall interest on the life of the loan and any commissions associated with your new loan. This way, you can determine if your personal loan will save you money.
You are underwater with your car loan
Owing more to your car than it’s worth (called negative equity or being “underwater” in the vehicle) is a dangerous situation. If your vehicle is stolen or accumulated, the insurance would only pay up to its market value – if you owe the bank more than that, you are expected to increase the difference immediately.
By repaying your car loan with a personal loan, you protect yourself from any costs associated with unexpected replacement of your vehicle. You will still owe more than the value of your car, but the loan will not be repaid on time if the vehicle is stolen or repaid.
You do not qualify for a car loan refinancing
Most Car loan refinancing lenders have maximum loan-to-value (LTV) ratios they will accept. This means that they will refinance your auto loan only if you have accumulated a certain amount of equity in the vehicle.
If your LTV is too high, you may not be eligible for refinancing. Conversely, a personal loan can help you “refinance” into a lower interest rate product, but without the LTV requirement.
Credible allows you compare personal loan rates from various lenders within minutes.
If using a personal loan to pay off your car is not the right answer for you, here are some other ways to pay off your car loan early.
- Round off your monthly payments. Paying a little extra money for your car loan every month will help you save money and get rid of debt sooner. An easy way to do this is to round out your payments if you can.
- Make a payment every two weeks. Making payments every two weeks is another manageable way to pay extra for your loan without feeling so overwhelmed. 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’re getting a Christmas bonus or you just have some savings on the side, paying an extra payment each year can get you out of debt much earlier. It will also reduce the total interest paid on your loan.