Should I get a bank loan or car finance to buy a car?
You’ve chosen the car, taken it on a test drive (twice) but are stuck at a final crossroad: do you fund it with a bank loan or use car finance instead?
It’s a big financial decision and working out how to best pay can be tricky. We look at your options and highlight the pros and cons to help you decide.
You’ve chosen the car, taken it on a test drive (twice) but are stuck at a final crossroad: do you fund it with a bank loan or use car finance instead?
It’s a big financial decision and working out how to best pay can be tricky. We look at your options and highlight the pros and cons to help you decide.
60-second summaryJust want the basics? Here’s an at-a-glance guide to help you decide between a bank loan and car finance.
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What is car finance?
Car finance is a way of borrowing money to help you buy a new or used car from a dealership. You can choose from:
- Hire Purchase (HP): you pay a deposit, then make monthly payments including interest. The car belongs to you after the final repayment.
- Personal Contract Purchase (PCP): like hire purchase, you pay a monthly sum after putting down a deposit. When your contract ends, you can buy the car outright with a final ‘balloon’ payment, hand it back or use any remaining equity towards another vehicle in a new deal.
- Leasing: each month you pay ‘rent’ for a car for a set time. When your final payment is due, you give the car back or take out a new lease. You won’t own the car at any point.
What is a personal loan to buy a car?
A personal loan for a car sees you borrow a lump sum from a lender – usually a bank or building society – to buy the car on the spot. You then repay the loan, with interest, in fixed monthly instalments.
The cost of your personal loan depends on:
- How much you want to borrow
- Your income
- Your credit score
- How long you’ll take to pay back the loan.
You’re more likely to be offered a cheap loan rate if you have an excellent credit score. If you have a poor score or no credit score, you may not be offered a loan or could be offered one with a higher interest rate.
Find a loanWhat are the differences between car dealer finance and a bank loan?
| Car finance | Loan | |
|---|---|---|
| Will I own the car from the start of the agreement? | No | Yes |
| Do I need to pay a deposit up front? | Yes | No |
| Are the monthly repayments fixed? | Yes | Yes |
| If I default on the payments, can the car be repossessed? | Yes | Potentially^ |
| Can I buy the car from a car dealership? | Yes | Yes |
| Can I buy the car privately? | No | Yes |
| Will I own the car at the end of the agreement? | Possible (with PCP/HP, not leasing) | Yes |
| Can I return the car at the end of the agreement? | Yes (PCP and leasing) | No |
| Are there any mileage restrictions? | Yes (PCP and leasing) | No |
| Can I modify the car during the agreement? | No | Yes |
^Most personal loans for cars are ‘unsecured’. If you can’t repay, a lender could go to court to get the money back. If you were to take out a ‘secured’ personal loan instead, your car could be taken.
What are the pros and cons of car finance?
Here’s what you need to know if you’re thinking of applying for finance from a dealership:
The pros…
- Offers a range of finance options to suit different budgets and circumstances
- Lets you spread the cost of a new car with smaller payments
- Could be easier to get finance than be approved for a personal loan if you have a poor credit score
- Could give you the option to return the car at the end of the contract
- Allows you to buy a more expensive car than if buying outright
- Could help improve your credit score if you keep up with the repayments.
The cons…
- Typically offers higher interest rates than a personal loan
- Dealerships only stock certain cars, limiting your choice (plus you can’t buy from a private seller)
- You won’t own the car until you’ve made all the repayments
- Missed payments can damage your credit score
- Exceeding your mileage limit on lease or some contracts could mean you’re charged extra
- You may have to pay for repairs if you hand back a PCP car with more damage than what’s classed as ‘fair wear and tear’.
What are the pros and cons of a personal loan?
Here’s what you need to know if you’re thinking of applying for a personal loan to buy a car:
The pros…
- If you have a good credit score, you could get a lower interest rate than you would on a car finance deal
- No deposit needed
- You own the car from the start, meaning you can drive without any mileage restrictions and make car modifications if you want
- Greater choice – especially if you’re after a second-hand or used car – as you can buy from private sellers as well as dealerships.
The cons…
- You’ll need a good credit score for better rates of interest
- Might not work for you at all if you have no credit history or a poor credit score
- You can’t return the car or exchange it for a new model when you’ve repaid the loan
- The car might be worth a lot less than you paid overall for the loan by the time you pay it off.
Is a bank loan or car finance cheaper?
There’s no one answer as it depends on many factors, so make sure you do your own checks.
Generally speaking, if you want to keep your monthly payments as low as possible, then a PCP deal could be right for you, but it’s not an exact science. Your payments are often smaller because – with one big final ‘balloon’ payment to be made at the very end of your contract if you want to keep the car – there’s less of a car cost to cover in the meantime.
However, a personal loan could be cheaper overall if you have a good credit score as you’re more likely to be offered lower rates.
If you have a poor credit history, you’re more likely to be offered an affordable rate on car finance than a personal loan.
This guide provides general tips, but always check the details of any loan or car finance deal you’re interested in to find out how much it could cost you.
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.
About Car Finance 247 Limited (Car Finance 247)
Car Finance 247 Limited (Car Finance 247) is one of the UK’s leading car finance brokers uniting buyers, car dealers and finance providers. Car Finance 247 acts as a credit broker, not a lender, which means they will offer you the best finance deal that you’re eligible for from their wide panel of lenders.
Car Finance 247 is authorised and regulated by the Financial Conduct Authority (653019).
Car Finance 247 is not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner Car Finance 247 earns. All applications are subject to lending and eligibility criteria.
Car Finance 247 will not charge you a broker fee should you decide to proceed with a car finance product.
The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.
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