Using a Personal Loan to Pay Off Your Car
You can use a personal loan to pay off your car, but whether it’s a good idea will depend on your credit score and financial position. If you swap out your auto loan for an unsecured personal loan, your car will no longer serve as collateral. But unless you have excellent credit, personal loans may come with much higher interest rates.
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When should you use a personal loan to pay off a car?
Using a personal loan to pay off a car loan is best if you have excellent credit and can qualify for low annual percentage rates (APRs). This is a measure of how much a loan will end up costing you, including the interest and fees. An excellent credit score is considered to be at least 740 for FICO and 750 for VantageScore.
However, personal loans are typically unsecured — meaning they don’t require collateral — while auto loans are usually secured by the vehicle. While this means your car is at risk of repossession if you are unable to repay your car loan, it also means you’re more likely to receive lower rates than you would with an unsecured personal loan. Keep in mind that personal loan requirements are typically stricter than the qualifications for an auto loan.
When weighing personal loans versus auto loans, the biggest factor in your decision will likely come down to the interest rate you’ll receive for these types of loans. If your auto loan rate is higher than the rate you can receive on a personal loan, it could be a smart idea.
| Lender | Auto loan starting APR | Personal loan starting APR |
|---|---|---|
| Navy Federal Credit Union | 4.54% | 8.99% |
| PenFed Credit Union | 5.24% | 7.99% |
| Consumers Credit Union | 6.34%* | 10.49%* |
| Alliant Credit Union | 6.00%* | 11.79%* |
| LightStream | 7.49%* | 7.49%* |
*Rate includes autopay discount
Pros and cons of using a personal loan to pay off a car
| Pros | Cons |
|---|---|
Unsecured loan won't require car as collateral Easier to sell your car once the auto loan is paid off May receive better repayment terms | Likely to come with higher APRs Lender may charge an origination fee Unsecured loans can be harder to qualify for |
An unsecured personal loan won’t require that you use your car as collateral. This way, if you’re unable to repay your loan, you won’t lose your vehicle (though your credit score will take a significant hit). You may also get better loan terms, though you’ll have to weigh whether you want a short-term or long-term loan.
Plus, it can be very complicated to sell your car with an auto loan attached. If you use a personal loan to pay off your car, you’ll receive the title from your auto lender, enabling you to sell it more easily.
But using a personal loan to pay off a car loan has its drawbacks. Personal loans typically come with higher APRs than auto loans, so this could be an expensive option. It may also cost you more because some lenders charge an origination fee — a one-time administrative fee — when you take out a personal loan. Unsecured loans also can be harder to qualify for, especially if you need a bad credit personal loan.
Finding a personal loan to pay off your car
Just as you shopped around for an auto loan, you’ll also need to compare personal loan rates, terms, fees and borrowing limits to ensure you find a lender that will best fit your needs.
Determine your budget
Before taking out a personal loan, you’ll need to determine how much you still owe on your car note and how much you can afford to borrow. Consider details like fees, interest and minimum monthly payments.
In particular, the length of your loan will play a big role in the size of your payments — the longer the loan, the smaller the monthly payments but the more you’ll pay in interest over the life of the loan. With a shorter loan, you’ll have larger monthly payments but pay less in interest overall. You can use a personal loan calculator to determine the terms that work for you.
Check your credit scores and reports
Your credit score and the activity on your credit reports will play an important role in determining whether you’ll qualify for a personal loan and the rates you’ll receive. Some personal loan lenders require borrowers to have a good credit score and a low debt-to-income ratio. They may also consider activity on your credit reports like late payments, the age of your credit accounts and any recent hard credit pulls.
The events on your credit reports are used to calculate your credit score. Unfortunately, it’s common to have errors on your credit reports that could be weighing your score down. If you find incorrect information, you can dispute the errors with the credit bureaus and the reporting company.
Prequalify with at least three lenders
Now it’s time to shop around for lenders that offer personal loans. Be sure to request rates from at least three lenders to get an idea of the loans you may qualify for.
Most lenders allow you to prequalify for a personal loan. This means the lender will run a soft credit pull that won’t impact your credit score. Prequalifying for a personal loan allows you to see potential rates, terms, fees and loan amounts from lenders.
Choose a lender
Once you choose a lender, you’ll have to provide personal information and documents to verify your identity and income. During this part of the process, your lender will run a hard credit pull, which will allow them to see the information on your credit reports and determine your creditworthiness. This can cause your credit score to drop by up to five points, but the hard pull should only stay on your reports for up to two years.
Use your personal loan to pay off your auto loan
If your loan application is approved, you’ll sign the contract and wait to receive your personal loan funds, typically by direct deposit. With cash in hand, you can use the funds to pay off your car loan. Finally, your lender will send you the title to your car and you can get it transferred into your name.