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Buying A Car With A Personal Loan

If you can’t afford to buy a new set of wheels outright, a personal loan can be a good option as it’s often the cheapest way to finance a car. Our helpful guide looks at the pros and cons and how it compares with car finance plans.

If you can’t afford to buy a new set of wheels outright, a personal loan can be a good option as it’s often the cheapest way to finance a car. Our helpful guide looks at the pros and cons and how it compares with car finance plans.

Anelda Knoesen
From the Money team
3
minute read
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Posted 18 SEPTEMBER 2020

What is a bank loan for a car?

Banks can offer a choice of two different types of loan to help you buy a car – a personal loan and a car loan.

A personal loan can be used for lots of different things such as home improvements and buying a car. You’ll often see personal loans marketed to potential car buyers by banks, building societies and supermarkets but, in reality, you can spend the money you borrow using a personal loan on anything. A personal loan is an unsecured loan.

Personal loans are a way of borrowing that you organise yourself to pay for a car and an option worth weighing up alongside other car finance schemes offered by car dealerships, online brokers and lenders.

Lenders like banks may also offer specific car loans. These are different from a personal loan because they are secured loans and can only be used to borrow money to buy a vehicle. That means if you don’t keep up with your repayments, the lender could repossess your car.

Unlike with car finance, buying a car with a personal loan means you can own it outright as soon as you’ve paid a dealership or private seller.

How does a personal car loan work?

With a car loan from a bank or other lender, you can borrow an agreed amount of money over a set period, then repay it in monthly instalments, at a fixed rate of interest. The rate you get will depend on your credit score. You can reduce the annual percentage rate APR you get on a car loan by fixing errors on your credit file as well as shopping around for the right deal.

If you can contribute some of your own savings towards the cost of the car, you won’t need to borrow as much, which can help to keep your repayments down.

Why buy a car with a personal loan?

The main benefits of choosing a personal loan to buy a car include:

  • Affordability – personal loan interest rates tend to be cheaper than dealer finance, unless you can get 0% finance from the dealer. You’ll also be able to compare loans so that you know you’re getting the best option for you – rather than the one the dealer has available.
  • Flexibility – you can spread your repayments for up to seven years without the need to secure the loan against an asset. The longer the timeframe, the more interest you’ll pay overall though. You don’t have to buy a car through a dealer and there are no maximum mileage limits a year, so you can use your car exactly as you want.
  • Outright ownership – you'll own the car from the outset. That means you can make modifications or sell it on if you want to.

What are the drawbacks of personal car loans?

The main disadvantages of choosing a personal loan to buy a car include:

  • Reliance on your credit score – unless you have an excellent credit score, you won’t be offered the best interest rates you see advertised. A poor score might even mean lenders rejecting you altogether. But if you have poor credit, you’ll face similar issues with hire purchase, personal contracts hire and personal contract purchase plans.
  • No car-maker offers – you’ll likely miss out on manufacturer incentives that are often offered when you take out their finance.
  • Upgrade inconvenience – if you regularly buy a new car, contract purchases – a type of car finance - can let you trade up more easily. With a loan you’ll have to negotiate the trade-in of your vehicle and make sure you’ve got the best loan arrangement in place when you want to buy.

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

We know that car loans and car finance can be a bit of a minefield, but it’s important you understand the different options available to get the right deal for you. There’s no one-size fits all answer. You’ll need to consider what matters most to you – from the cost of monthly payments to whether or not you own the car at the end.

Car finance plans include hire purchase and personal contract purchase. With both these schemes, you’ll usually put down a deposit and pay for the car in monthly instalments.

Personal contract purchases give you the option to hand the car back at the end of the agreement, part-exchange or buy the car outright with a ‘balloon payment’. With hire purchase contracts, you own the car once all the payments have been made.

There are also car leasing plans that let you rent a car for an agreed period.

Get the lowdown on how car finance works

You should always compare personal loans against car finance plans and ask yourself these questions before you make a decision about whether to get a car loan:

  1. Do you have a good credit score?
  2. Do you have enough savings for a deposit?
  3. How much can you afford to pay back each month?
  4. Do you want to own the car outright?
  5. Are you likely to change your car again soon and particularly before you’ve paid the loan off?

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