Car loans

Are you ready to buy a new or used car? A car loan could help you start the journey to owning your car outright. Here we explore what you can expect from a personal car loan and how it differs from other kinds of car finance.

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What is a car loan?

What is a car loan?

What is a car loan?

A car loan is a type of finance that helps car buyers cover the cost of their purchase. The buyer borrows a lump sum of cash upfront and then makes monthly payments over a set amount of time (which can vary depending on the agreement type). Some of the benefits of car loans include:

Providing buyers with the opportunity to purchase cars without having to make the full payment up front

Flexibility: they allow buyers to spread their purchase over a period of time in a way that fits within their budget

They are usually paid off gradually, through smaller monthly payments, helping to keep ongoing costs manageable

You can get a car loan at lower interest rates than other types of personal or consumer credit, enabling buyers to save money in the long run

As with any kind of finance, it's important to do your research to understand which of the options will work best for you, before you make an agreement with your lender. 

Applying for a car loan

You can apply for a personal car loan from a number of places, including banks, credit unions, building societies, car dealers and specialist online lenders. In general, car loans tend to be much quicker to arrange than other types of car finance.


To qualify for a car loan you’ll have to pass a credit check. In most cases, the interest rates will be fixed but you may be able to find variable deals. You then just need to decide on the length of the loan period. This will usually be dependent on your monthly budget.

What are the other types of car finance?

What are the other types of car finance?

What are the other types of car finance?

Alongside car loans there are a range of other car finance options available. Alternatives to getting a car loan include hire purchase, personal contract purchase and personal contract hire.

Hire purchase

With hire purchase (HP), you borrow an amount equal to the value of the car. After paying an initial upfront deposit you then make fixed monthly payments over a pre-agreed term, during which the finance provider lets you use the vehicle. If you fail to keep up with your repayments, the lender may be able to reclaim the car. Once you have paid off the agreed amount in full, plus the option-to-purchase fee, you own the car. Find out more about hire purchase here.

Personal contract purchase

Personal contract purchase (PCP) agreements also let you borrow a fixed amount. With PCP deals, the amount you borrow tends to cover only the estimated depreciation of the car rather than its total value, meaning that the monthly repayments are often smaller. If you want to buy the car at the end of the agreement however, the final cost will be greater. As with HP, PCP agreements allow you to drive the car during the duration of the agreed term, but you don’t own the car. You are given the option of purchasing the vehicle at the end with a lump-sum 'balloon' payment. Find out more about PCP agreements here.

Personal contract hire

Personal contract hire (PCH) is a popular way to lease a car. With PCH you agree to hire the car for a set timeframe and you pay an initial upfront rental fee. You then have full use of the vehicle during the rental period and you return the car at the end. There is no option to buy at the end of the agreement.


Hire purchase

With hire purchase (HP), you borrow an amount equal to the value of the car. After paying an initial upfront deposit you then make fixed monthly payments over a pre-agreed term, during which the finance provider lets you use the vehicle. If you fail to keep up with your repayments, the lender may be able to reclaim the car. Once you have paid off the agreed amount in full, plus the option-to-purchase fee, you own the car. Find out more about hire purchase here.

Personal contract purchase

Personal contract purchase (PCP) agreements also let you borrow a fixed amount. With PCP deals, the amount you borrow tends to cover only the estimated depreciation of the car rather than its total value, meaning that the monthly repayments are often smaller. If you want to buy the car at the end of the agreement however, the final cost will be greater. As with HP, PCP agreements allow you to drive the car during the duration of the agreed term, but you don’t own the car. You are given the option of purchasing the vehicle at the end with a lump-sum 'balloon' payment. Find out more about PCP agreements here.

Personal contract hire

Personal contract hire (PCH) is a popular way to lease a car. With PCH you agree to hire the car for a set timeframe and you pay an initial upfront rental fee. You then have full use of the vehicle during the rental period and you return the car at the end. There is no option to buy at the end of the agreement.

Oodle logo on paper
Oodle logo on paper

Secured vs unsecured loans

Secured vs unsecured loans

Secured vs unsecured loans

With a secured loan, such as a mortgage, the lender will use an asset that belongs to you as security in case you can’t pay it off – usually the property itself – which they can claim if you fail to make your payments.


In the case of a personal loan, you use the funds to purchase the car outright, there is no asset attached to the agreement.


Although often spoken about in the same breath, HP and PCP products are not unsecured loans. They effectively represent the hiring of the vehicle. In the case of these products, the vehicle is owned by the finance provider until such time as the agreement and any option-to-purchase fee is paid off. The car can be repossessed by the lender if you can't make your payments.


Personal car loans don't require anything as security, but the interest rates may be higher than HP/PCP as a result.

What is the best car financing option for you?

Personal Car Loan

Typical length of agreement:

Usually 1-7 years

Initial deposit required?

No

Who owns the car?

You, although you will still need to repay the debt


Mileage restrictions

No

Personal Contract Purchase

Typical length of agreement:

Usually 1-5 years

Initial deposit required?

Usually but not always

Who owns the car?

The lender or finance company unless an optional final balloon payment is made

Mileage restrictions

Yes

Hire Purchase

Typical length of agreement:

Usually 1-5 years

Initial deposit required?

Usually but not always

Who owns the car?

The lender or finance company until final repayment plus option-to-purchase fee is made

Mileage restrictions

Sometimes

Personal Contract
Hire

Typical length of agreement:

Usually 1-4 years

Initial deposit required?

Usually but not always

Who owns the car?

The lender or finance company, always


Mileage restrictions

Yes

Key points to consider before getting a car loan

Key points to consider before getting a car loan

Key points to consider before getting a car loan

You will need a very good credit score to access the best deals and the monthly repayments can be higher than other car finance repayments and the interest rate could be higher, too.


Overall, a car loan can be a more straightforward way to purchase a car outright – you’ll own it from the start – but traditional car finance (HP, PCP) could be a more affordable option in the long run, despite the initial upfront deposit and inherent risk of repossession if you don't keep up your repayments.


Still unsure what sort of finance is right for you? Read our guide to car finance here.

The advantages of car loans include:

No deposit needed, simply borrow the amount of the car

You own the car outright (although you still need to repay the debt)

No mileage restrictions

You’re not tied in to the dealer or manufacturer

Check your eligibility with our car finance calculator

Car loans FAQs

Can I get a car loan if I’m unemployed?

Can I get a car loan if I’m unemployed?

Can I get a car loan if I’m unemployed?

How do I get a car loan?

How do I get a car loan?

How do I get a car loan?

Can I get a car loan for a private sale?

Can I get a car loan for a private sale?

Can I get a car loan for a private sale?

What happens if I don’t pay my car loan?

What happens if I don’t pay my car loan?

What happens if I don’t pay my car loan?