Getting a personal loan for a car
If you can’t afford to buy a new set of wheels outright, a personal loan could be the cheapest way to finance a car. Our guide looks at the pros and cons – as well as how getting a loan compares with car finance plans.
If you can’t afford to buy a new set of wheels outright, a personal loan could be the cheapest way to finance a car. Our guide looks at the pros and cons – as well as how getting a loan compares with car finance plans.
What is a personal loan for a car?
If you’re looking to borrow money to buy a car, lenders may offer you one of two options: a personal loan or a loan designed for buying a car.
You can use a personal loan for many different things, whether it’s home improvements or paying for a wedding. Banks, building societies and supermarkets often market personal loans to car buyers by referring to them as ‘car loans’.
But in reality, a personal loan is an unsecured loan that you can spend on anything you like. If you’re planning to take out a loan to buy a car, it’s worth comparing the cost with car finance schemes from dealerships and other lenders.
You might also find that banks offer specific car loans. Unlike a personal loan, these are secured loans and can only be used to buy a vehicle. This means if you don’t keep up your repayments, the lender could repossess your car.
Buying a car with a personal loan means you’ll own it straight away – unlike with car finance.
How does a personal loan for a car work?
With a personal loan for a car from a bank or other lender, you’ll borrow an agreed amount of money for a set time period. This amount is transferred directly to your bank account and you’ll pay it back in monthly instalments, at a fixed interest rate.
The interest rate you receive will depend on your credit score. You could reduce your car loan’s APR (annual percentage rate) by fixing any errors on your credit file, as well as shopping around for the right deal.
What are the pros of borrowing money for a car?
Getting a personal loan to buy a car has several benefits:
- Affordability – personal loan interest rates could be lower than those for car finance. You’ll also be able to compare loans so you know you’re getting the right option for you.
- Flexibility – you can spread your repayments for up to seven years without having to secure the loan against an asset like your home. Remember, the longer you have the loan, the more interest you’ll pay.
- Outright ownership – you’ll own the car from day one. That means you can make modifications or sell it if you want to.
What are the drawbacks of taking out a loan for a car?
Disadvantages of taking out a loan for a car include:
- Needing a good credit score – without a good credit score, you won’t be offered the best interest rates. If you have a bad credit score, lenders may reject you altogether. But if that’s the case, you’ll face similar issues with hire purchase, personal contracts hire and personal contract purchase plans.
- No special offers – you’re likely to miss out on the incentives manufacturers offer when you take out their finance.
- Upgrade inconvenience – if you regularly buy a new car, contract purchases – a type of car finance – often let you trade up more easily. With a loan, you’ll have to trade in your car and go through the process again.
How to finance a car purchase
| Type of finance | Agreement length | Deposit | Car owner |
| Cash purchase | N/A | N/A | You |
| 0% credit card | Anything from a few months to a few years | No | You (although you’re liable for the debt) |
| Personal loan | Between 12 and 120 months | No | You (again you're liable for the debt) |
| Personal contract purchase | Between three and five years | Yes | The finance company unless you make a 'balloon payment' at the end of the term |
| Hire purchase | Up to five years | Yes | The finance company - until you make the final payment |
| Leasing/personal contract hire | Usually one to four years | Yes | The finance company, at all times |
Personal loan vs car finance – which is best for me?
Personal loans and car finance can be a bit of a minefield, but it’s important to understand the options to get the right deal for you. You’ll need to consider what matters most – whether that’s your monthly payments or whether you own the car outright.
Car finance plans include hire purchase and personal contract purchase. These usually involve putting down a deposit and paying for the car in monthly instalments.
Personal contract purchases give you the option to hand back the car at the end of the agreement. Alternatively, you can part-exchange your car or buy it outright with a one-off ‘balloon payment’. With hire purchase contracts, you own the car once you’ve made all the payments.
There are also car leasing plans that let you rent a car for an agreed period.
You can also compare car finance with us to see which is the best option for you.
Always compare personal loans with car finance plans. Before making a decision about whether to take out a car loan, ask yourself:
- Do you have a good credit score?
- Do you have enough savings for a deposit?
- How much can you afford to pay back each month?
- Do you want to own the car outright?
- Are you likely to change your car again before you’ve paid off the loan?
Frequently asked questions
Is it cheaper to get car finance or a loan?
Whether a personal loan or a finance plan is cheaper will depend on your personal circumstances, particularly your credit score.
The better your credit score, the lower the interest rates you’ll likely be entitled to on a loan, keeping the overall cost of credit lower. However, if you have a poorer credit score you could get a better rate from a car finance deal. That’s why it’s important to weigh up the pros and cons of each, as well as comparing deals with us.
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 quickly 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 personal loan early?
Personal loan agreements are usually covered under 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.
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. Alternatively, you can use a car finance plan to get a loan that’s tied to the vehicle you’re buying.
How can I improve my chances of being accepted for a personal loan to buy a car?
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 – you’ll be able to see the sorts of interest rates you can expect to be offered.
- Borrow less – if you’re asking to borrow less, lenders will see you as less of a risk. That means they may be more willing to accept your loan application.
- Get a secured loan – if borrowing less isn’t an option for you, consider getting a secured loan. This secures the loan against an asset you own, like your home, giving you access to larger amounts. It’s important to remember, if you can’t keep up with your repayments on a secured loan, your lender could repossess your home.
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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.