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.
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?
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.
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?
Finding the right car finance option to suit your needs is important. The table below compares these options at a glance.
| Personal Car Loan | Personal Contract Purchase | Hire Purchase | Personal Contract Hire | |
|---|---|---|---|---|
| Typical length of agreement | Usually 1-7 years | Usually 1-5 years | Usually 1-5 years | Usually 1-4 years |
| Initial deposit required | No | Usually but not always | Usually but not always | Usually but not always |
| Who owns the car? | You, although you will still need to repay the debt | The lender or finance company unless an optional final balloon payment is made | The lender or finance company until final repayment plus option-to-purchase fee is made | The lender or finance company, always |
| Mileage restrictions | No | Yes | Sometimes | Yes |
Key points to consider before getting a car loan
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
However, 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.
Car finance calculator
Whichever form of finance you choose, it’s important to be aware of exactly how much you will be paying, monthly and overall, and the exact terms and conditions of the contract, before you lock in.
To help you decide, use our finance calculator to see an example of how much you could be paying each month.
Your monthly payment
£215.08
Total borrowed
£10,000
Total cost of credit
£3,004.80
Apply now for your personalised, no-obligation quote
Apply Now* Representative Example: With hire purchase credit of £10,000 over 60 months based on a cash price of £10,000 with £0 deposit and a representative APR of 15.9%, the amount payable would be £235.92 a month, with a total cost of credit of £4,255.20 and total amount payable of £14,255.20. The total amount payable includes a £50 documents fee and £50 option to purchase fee.
This calculator is for illustrative purposes only. The calculated monthly repayment is not a quote or an offer of finance. Our finance rates vary and depend on individual circumstances. You will not own the vehicle until you have made the final payment and the option to purchase fee. Lending is subject to status and available to applicants over 18 years old.
Car loans FAQs
- Can I get a car loan if I’m unemployed?
Yes, some lenders will still offer car finance if you’re unemployed providing you meet certain conditions, although it will be more expensive than for someone in regular work with a good credit rating. The loans available if you’re unemployed are likely to be high-interest unsecured personal loans. Be sure that any lender you’re considering is registered with the Financial Conduct Authority (FCA) before you proceed, and make sure the loan comes with a fixed rate of interest.
- How do I get a car loan?
You can apply for a personal loan from your bank, building society or from a specialist finance provider. Every lender will have their own specific requirements and usually you will have to be over 18. You will then need to pass a credit check to ensure eligibility. The credit score required will vary according to the lender – it’s a good idea to review your credit score before you apply for a car loan or another type of car finance.
- Can I get a car loan for a private sale?
If you are taking out a personal loan from a bank or building society in order to purchase a car upfront, you are entitled to buy from a private seller or a dealership as you wish. Keep in mind that you will have less protection with a private sale, although cars bought privately are usually less expensive than those purchased through dealers.
- What happens if I don’t pay my car loan?
Defaulting on loan repayments will seriously impact your credit score, affecting your ability to borrow in the future. While they can't repossess the vehicle, the debt may eventually be passed on to debt collection agencies or you could be taken to court.