Car loans

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What is a car loan?

A car loan is a personal loan that you can take out to buy a new or used car.

You borrow an agreed amount from a lender, usually a bank or building society, then pay it back in fixed monthly instalments with interest over a set period.

Unlike other types of car finance, a personal car loan lets you buy a car outright and own it straight away.

Did you know?

23% of people who apply for a loan through us plan to use it for a car, with the average amount borrowed coming in at £12,6452.

When you compare car loans with us, you might see a mix of personal loans, hire purchase (HP) and personal contract purchase (PCP) deals, depending on what you’re eligible for.

This page focuses on personal loans that you can use to buy a new car.

How do car loans work?

Find a car you’d like to buy

Decide on your target budget. You can use our loan calculator to work out how much you can afford to borrow and what your monthly repayments could be.

Take time to pick a car that suits you. Because a personal loan can be used to buy from private owners as well as at dealerships, you have a much greater choice than if using car finance.

Apply for a loan

When you apply for a loan, the lender will check your income, expenses, employment and credit history to decide if you’re eligible and what interest rate to charge you.

Look out for the money in your account

If your loan application is successful, the cash will be paid directly into your bank account. It could take just a few hours to arrive if you’re an existing customer. If you’ve applied to a new lender, it could take a couple of days.

Pay off your loan each month

Repay the loan, plus interest, in monthly instalments over a fixed period. Be sure to make your repayments on time, every month, to avoid late payment fees.

What are the advantages and disadvantages of a car loan?

Advantages of a car loan

  • Spreading the cost can help you to buy a car that you can’t afford to pay for in one go

  • Keeping up with repayments can boost your credit score

  • You own the car from the minute you drive off in it, so you can modify it or sell it when you want

  • Once you’ve paid off the loan, you don’t have to make a final balloon payment to keep it, unlike some car finance deals

Disadvantages of a car loan

  • The longer you take to repay the loan, the more interest you pay – and that increases the overall cost of your loan

  • You typically need a good credit score to qualify for the best car loan deals

  • Missing a payment can damage your credit score and make it harder to get credit in the future

  • You might miss out on special offers from car manufacturers tied exclusively to their finance packages

What’s the difference between secured and unsecured car loans?

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Secured loans

Secured loans are secured against a valuable asset, which can be repossessed if you don’t keep up with the loan repayments. So if you buy your car with a secured loan, the car could be seized if you fall behind or stop making your monthly payments.

Because secured loans are less risky for lenders, you can usually borrow a larger sum of money compared with an unsecured loan. Interest rates tend to be lower too.

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Unsecured personal loan

Unsecured personal loans let you borrow money without putting up an asset. You typically pay a higher rate of interest compared with a secured loan.

Read more on the differences between secured and unsecured loans.

How much does a car loan cost?

How much a car loan will cost depends on:

  • The amount you borrow – the more cash you need to buy your new car, the more you’ll have to pay back.

  • The interest rate – depending on your credit score, the rate you’ll get could be higher or lower than the advertised representative APR.

  • The loan term – a longer loan term can mean lower monthly repayments. But it also means you’ll be paying interest for longer, so the loan will cost you more overall.

Our data shows the average duration of a car loan is 50 months2.

How to get a car loan with bad credit

If you have a low credit score, it could still be possible to get a car loan. But you’re likely to be charged a high rate of interest with a bad credit loan.

Here’s how to improve your chances of being accepted and getting a better car loan deal.

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Improve your credit rating

Getting on the electoral roll, paying bills on time and checking your credit report for errors are just some of the steps you can take to build your credit score.

A higher credit score will give you access to a wider range of car loans with a lower interest rate.

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Find a guarantor

With a guarantor loan, a family member or friend agrees to pay your monthly loan repayments if you can’t. Having a guarantor helps lenders reduce risk, so they may be more willing to lend to you.

You can’t compare guarantor loans with Compare the Market.

Am I eligible for a car loan?

This will depend on several factors, including:

  • Your credit score

  • How much you want to borrow

  • Your income and existing debts.

Before you apply, you can check which car loans you might be accepted for by using our loan eligibility checker. It’s a soft search, so it won’t affect your credit score in any way.

Check car loan eligibility

Alternatives to a car loan

Not sure if a car loan is right for you? Here are some car finance alternatives to consider:
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Hire purchase

With hire purchase (HP) you put down a deposit, then make monthly repayments for a fixed period. Once the agreement ends, the car will be yours to keep.

Learn more about HP
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Personal contract purchase (PCP)

Put down a deposit, then pay off the car in monthly instalments. At the end of your personal contract purchase (PCP) agreement, you usually have a choice:

  • Return the car to the dealership

  • Make a ‘balloon’ payment and keep it

  • Exchange the car for another in an ‘upgrade’ deal at the dealership. This renews your PCP.

Learn more about PCP
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Purchase contract hire (PCH)

Purchase contract hire (PCH) is, essentially, a long-term leasing agreement. You pay a monthly fee to rent the car for two or three years, then return it at the end of the agreed period.

You can’t currently compare PCH options through Compare the Market.

Personal loan vs car finance – which is best for me?

Deciding between a bank loan and car finance will largely depend on your finances and personal preferences. .

Car finance will often give you lower monthly repayments than a personal loan, but could end up being more expensive overall. That’s especially true if there’s a balloon payment to make at the end of the contract.

Before making a decision about whether to take out a car loan, ask yourself:

  1. Do I have a good credit score?

  2. Do I have enough savings for a deposit?

  3. How much can I afford to pay back each month?

  4. Do I want to own the car outright?

  5. Am I likely to want to change my car again before I’ve paid off the loan?

The answers will give you a better idea of what’s right for you.

Sajni Shah

What our expert says...

“A car loan can help you get behind the wheel sooner, but remember to factor in the other costs that come with owning a car, such as insurance, fuel and servicing. Leaving some flexibility in your budget could make it easier to handle any unexpected expenses that come your way.”

Sajni Shah, Personal finance expert

Car loan help and guides

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Car finance calculator

Estimate your payments and see how much you could borrow

Personal loan calculator

Estimate monthly repayments and compare loan costs over time

Loan eligibility checker

Check which loans and rates you could be offered before you apply

FAQs

How long is a car loan for?

Personal car loans usually last between one and seven years. However, loan terms can vary among lenders.

Small loans are typically paid back within 12 months. Long-term loans tend to be for larger amounts and can be paid back over 10 to 15 years or more.

In most cases, you can choose how long you’d like to take to repay the loan. Just remember, the longer the loan term, the more interest you’ll pay overall.

What is a good APR for a car loan?

Interest rates tend to follow the Bank of England base rate, so a good rate will depend on what’s on offer in the current economic climate.

Typically, the higher your credit score, the better APR you’ll get. You may also find that larger loans offer lower rates than small loans.

Who has the lowest car loan rates?

Interest rates are constantly moving around, so the lender with the best rates could change at any point. The rate you’ll be offered also depends on your financial situation and personal credit score.

That’s why it’s a good idea to shop around and compare car loan deals. When you compare our best car loan rates, you can check your eligibility without impacting your credit score. You’ll be able to see which eligible lenders are offering the lowest car loan rates.

How can I keep my repayments as low as possible?

Here are some ways to lower your loan repayments:

  • Borrow less – if you’re worried about not being able to keep up with your repayments, consider buying a cheaper car and borrowing less to pay for it.

  • Look for the lowest interest rate – comparing loans to find a lower interest rate can help you save big. Just watch out for extra fees.

  • Shop around – with Compare the Market, you can compare dozens of loans, allowing you to sort by the cheapest results.

To get an idea of your monthly repayments, use our loan calculator.

Is it possible to repay a car loan early?

Personal loan agreements are usually covered by the Consumer Credit Act, giving you the right to pay off a loan early. This will save you paying interest for the full term, but there are usually early repayment charges.

Check the terms and conditions before taking out any loan, especially if you think you might be in a position to pay it off early. If you’ve already taken out the loan, contact your lender and ask how much it will cost to settle early.

How do I switch car loans?

If you’re in the middle of a car finance agreement, you might consider refinancing to a lower interest deal. Or if you’re at the end of a PCP (personal contract purchase), you may want to borrow more to make your final balloon payment.

One way to refinance your car is to switch to a car loan. To do this you’ll need the settlement figure to find out how much you should borrow. You may also need to add the cost of an early repayment fee if you’re leaving in the middle of your finance agreement

If you’re approved for a car loan, you can use the money to pay the outstanding balance on your car

At this point, you’ll own the car outright and the finance company will no longer be involved. It’s now your responsibility to pay back the car loan to your new lender in monthly instalments over a fixed period.

What happens if there’s an issue with the car?

If you’re using a personal loan to buy a car and later discover an issue with the vehicle, it’s unlikely your lender will help.

Since you can use a personal loan for anything, it has nothing to do with the lender. So even if the car is faulty, you’ll still need to keep up your repayments.

If you want to make sure you’re protected, look for a car warranty from a dealer.

How can I improve my chances of being accepted for a car loan?

Here’s how to increase your chances of being accepted for a personal car loan:

  • Check your credit score – you can check your credit score with a credit reference agency like Experian, Equifax or TransUnion.

  • Use our loan eligibility checker – we’ll show you which loans you’re most likely to be accepted for.

  • Reduce your monthly outgoings if possible – the less you’re spending, the greater your affordability (your ability to afford repayments) will be.

  • Borrow less – if you’re asking to borrow less, lenders will see you as less of a risk.

  • Consider a secured loan – if borrowing less isn’t an option, you could look at a secured loan. But remember that if you can’t keep up with the repayments, your lender could repossess the asset you secured it against.

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Charlie Evans
Reviewed 19 Aug 2026 by Charlie Evans Personal finance expert

Charlie is a senior commercial leader with close to a decade of experience across the UK’s leading personal-finance and comparison platforms. Before joining Compare the Market as Head of Commercial in 2024, he held senior commercial roles at TotallyMoney and MoneySuperMarket Group.

Methodology

1Based on the % of respondents claiming they have used Compare the Market in the last 12 months vs. other leading PCWs. Source: Savanta BrandVue Financial Services, National Representative Survey of 12,257 respondents (June 2026)​

2Correct as of June 2026.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.