Car Finance vs Personal Loans

If you’re looking into your options when it comes to getting a new vehicle, if you’re not able to buy the car outright, your two main choices are car finance and personal loans. Which one you opt for will depend on your personal circumstances, but to help you decide, we’ve outlined the key points of both below!

Buying a Car With a Personal Loan

You can take out a personal loan with a bank or building society, as well as with a variety of short term lenders. A personal loan is essentially an unsecured loan that you can pay back over a number of years – typically between one and seven years. As with any other type of credit, the better your credit score, the more favourable rates you’ll be offered.

It’s therefore important to compare loans before borrowing, looking at the APR (Annual Percentage Rate) and other key loan features. For instance, some lenders may charge you a fee for early repayments.

Personal Loan Pros and Cons

If you are able to take out a low interest personal loan, this may be a good option when it comes to buying a new vehicle. But if you have a bad credit history, the interest rates you’re offered could be fairly high, and you may wish to consider other options.

Overall, your individual situation will determine whether a personal loan is right for you. But to help you weigh up the pros and cons of personal loans, we’ve listed the main things to think about below:

Advantages

• If you have a good credit rating, you should be able to access the best rates available. Therefore a personal loan could be the cheapest option when buying a vehicle
• A personal loan is a straightforward and easy way to finance a car
• Because you’ll own the car, if you no longer wanted it, or couldn’t keep to the loan repayments, you can simply sell the vehicle
• The interest rates of a personal loan are normally fixed, so the instalments are easy to budget for
• You can apply for a personal loan online, over the phone, or face-to-face

Disadvantages

• The monthly repayments can be higher with personal loans, compared to other options, especially if you have less than perfect credit
• Many people won’t get the advertised interest rate – these are representative rates, and therefore won’t apply to everybody
• While some lenders are able to pay out immediately, with traditional lenders like banks, it can take a few days for the funds to be transferred to your account
• As you’ll own the vehicle outright, you’ll be responsible for all associated costs, such as repairs and maintenance
• You may end up borrowing more than you need, as the interest rates tend to go down the more you borrow

If you do decide that a personal loan isn’t the best choice for you in terms of buying a new vehicle, there are a few car financing options you can choose from instead.

Car Finance Options

When it comes to buying a car on finance, there are two main options – hire purchase and personal contract purchase. And while the loan terms are fairly similar, there are a few key differences. We’ve outlined both types of vehicle loan in more detail below:

Personal Contract Purchase (PCP)

With a personal contract purchase agreement, after you’ve paid the deposit, your monthly repayments go towards the depreciation of the car, rather than its value. This means that the lender estimates the price of the car at the end of the agreement, and you’ll pay the difference between that, and what the car is worth at the start of the term. And then once your contract finishes, you can choose to make what is known as a balloon payment, which covers the remaining cost of the vehicle. Alternatively, you can take out a new agreement, or simply hand back the keys to the car.

Hire Purchase (HP)

Hire purchase works in the same way as PCP, in that you’ll probably need to put down an initial deposit, and then make monthly repayments. But instead of paying off the depreciation of the vehicle, you’ll be covering the cost of the car. So when you make your final instalment, you’ll own the vehicle outright. The only thing to keep in mind is that because you’ll be paying for the car through your instalments, the monthly payments are generally higher than with a PCP agreement.

Benefits of Car Finance

One of the best things about buying a car on finance is that it’s a type of secured loan. This means that there is less risk for the lender, thus the interest rates are typically lower. So if you have bad credit, car finance may be the cheapest option.

Another benefit of car loans is their flexibility. You can generally choose your repayment terms to align with your budget, and some lenders even offer no deposit car finance. And as the rates should be fixed, you’ll know how much you’ll be paying each month.

Each of the options come with their own advantages too. For example, one of the benefits of PCP is that you have a choice as to what to do with your vehicle at the end of the agreement. You can trade it in for another model, buy the car with a balloon payment, or walk away completely. And with HP, perhaps the main advantage is that you don’t need to make a large payment at the end of your contract to own the vehicle – you’ll spread the cost of the car over your entire loan term.

Car Finance Deals

When it comes to getting a good deal on your car finance agreement, there are two main ways to go about this. The first thing you should do is look at your credit score. If you have a bad credit rating, this could be impacting the interest rate you’re offered by car finance companies. You can check your credit score for free using sites like Experian and Credit Karma.

And if you do have a low credit score, there are easy ways to increase it. Both Credit Karma and Experian offer lots of handy tips on improving your rating, and signing up with the latter could get you an instant boost. They do this by looking at regular payments like your Netflix subscription when calculating your credit score – such payments show that you can keep to an agreement.

Another great way of getting a good deal on your car loan is to shop around. Don’t just apply with the first lender you come across! It’s sensible to either use a comparison site, or a broker service like Vehicle Finance Today. We can compare car finance lenders for you, taking into account your personal circumstances, and whether you meet the eligibility criteria. And if you’re still not sure, you can use our car loan calculator to find out how much you could borrow!