A personal loan is a type of unsecured loan that isn’t backed by collateral, such as a car or house. These installment loans are great for building credit since you get a fixed repayment term with a fixed interest rate. However, you can’t use a personal loan as a down payment on an auto loan, and taking one out may even hinder your chances of getting approved.
How a Personal Loan Could Affect Buying a Car
Many consumers choose to take out a personal loan as a means to build or rebuild credit. While this can definitely help, taking out a personal loan could affect your car buying experience. Not only can you not use it as a down payment, you’re faced with a major drawback: it affects your monthly budget.
When you take out a personal loan, you agree to pay back a set amount over a set period of time. Because a personal loan is a type of installment loan, you’re going to be charged interest.
If you don’t have the best credit, the interest rate you qualify for on a personal loan could be high, which means a higher monthly payment for the amount borrowed. You could always refinance the loan after your credit improves, but if you’re on a tight budget already and are planning on getting an auto loan, you may want to reconsider a personal loan.
How to Come Up with a Down Payment
Since lenders don’t allow you to use a personal loan as a down payment because it affects your debt to income ratio, how do you come up with a down payment?
You have three options to consider:
- Trade-in equity – If you have a vehicle that has equity in it, meaning it's worth more than what you owe on its loan, you can use that toward the down payment requirement. A good tip is to make sure you get the car appraised by at least two dealers, so that you can pick the best deal possible.
- Cash – If you don’t have a vehicle to trade in or you’re currently upside down in the loan, you can always make a down payment in cash.
- Combination of both – If you have a trade-in with equity but want to make a larger down payment, you can always add cash on top of the trade. Making a larger down payment actually lowers the overall cost of the loan, and can help you save money.
As for how much of a down payment you need, it varies by lender. Generally speaking, subprime lenders require a down payment of 10% of the car’s selling price or $1,000, whichever is less. Make sure you ask the lender about this, so you know the amount you need.
The Bottom Line
Personal loans are great for credit building, but can’t be used as a down payment on an auto loan. However, with some planning and research, you may be able to qualify for a car loan without ever needing a personal loan.
When you’re ready, let Drivers Lane lead the way to your next auto loan. We’ve helped bad credit car buyers nationwide get connected with local dealerships that know how to work through unique credit situations.
To see what we can do for you, start the process today by completing our free, easy, and fast auto loan request form.