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.
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.
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.
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
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