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. 

Alex Hasty
Insurance and finance expert
minute read
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Posted 27 SEPTEMBER 2021

What is a personal loan for a car?

Lenders can offer a choice of two different types of loan to help you buy a car – a personal loan or a loan designed specifically for buying a car.

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 lower than alternative car 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 a good 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 or use our handy car finance calculator for more information about how much you could borrow.

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?

Frequently asked questions

What can I do to keep my repayments as low as possible?

Here are some tips on keeping your loan repayments as low as possible: 

  • Borrow less – yes, we’re starting with the obvious, but the easiest way to keep your repayments down is to simply borrow less. If you’re worried about not being able to keep up with your repayments, then you should consider looking for a cheaper car and borrowing less to pay for it.
  • Look for the lowest interest rate – when borrowing money, the interest rate is one of the most important numbers to take note of. This is because the interest rate, along with the loan amount, is what is used to calculate your monthly repayments. Comparing loan offers to find a lower interest rate can help you save big across the full loan term. Just watch out for any extra loan fees. While a rate might look really low, any additional fees could make the overall cost more expensive.
  • Shop around – this is where we come in. With Compare the Market, you can quickly compare dozens of loans through our comparison service, allowing you to sort by the cheapest results. 

To help you get an idea of how much your monthly repayments could be, 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. Doing so will save you paying interest for the full term, but there will usually be early repayment charges. If you think you might be in the position to repay your loan early, or would like the option to overpay with your monthly repayments, check the terms and conditions of the agreement before taking out the loan. If you’ve already taken out the loan, you’ll need to contact your lender and ask them how much it would cost to settle the loan early.

What happens if there is an issue with the car?

If you're using a personal loan to buy a car, and you later discover an issue with the vehicle, it’s unlikely that your lender will offer any support. Personal loans can be used for anything, so the loan isn’t specifically connected to the car, unless you specifically agree that with the lender. This means, even if the car is faulty, you’ll still be responsible for keeping up with your repayments. 

To get the assistance or protection you need for the car you’re borrowing, you should look for a car warranty when buying from the car dealer, or use a car finance plan to get a loan or repayment plan 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 are some things you can do to improve your chances of being accepted for a personal loan to buy a car: 

  • Check your credit score – your credit score is one of the main things lenders look at when deciding whether to accept your loan application. You can check your credit score with a credit reference agency like Experian, Equifax or TransUnion.
  • Use our loan eligibility checker – to give yourself an idea of the loans you could be eligible for, use our loans eligibility checker. You’ll be able to see the sorts of rates you can expect to be offered, if you went to make a full loan application.
  • Borrow less – if you’re worried about being accepted, consider applying for a lower loan amount. If you’re asking to borrow less, lenders will see you as less of a risk, which means they may be more willing to accept your loan application.
  • Get a secured loan – if borrowing less isn’t an option for you, then you could consider getting a secured loan. This secures the loan against an asset you own, like your home, in order to borrow larger amounts. By securing your loan against an asset as collateral, lenders are reassured that there’s less risk to them. Just be aware, if you can’t keep up with your repayments on a secured loan, your lender has the right to repossess the collateral you offer, which could include your home. 

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