Is a bank loan better than dealer car finance?

There are lots of options if you want to buy a car on finance, many of which are offered by car makers and dealers, including personal contract purchase (PCP), hire purchase (HP) and personal contract hire (PCH). They’re all slightly different and may or may not suit you depending on your circumstances.

However, it's possible to bypass the manufacturer/dealer finance model altogether with a personal loan from a bank or other provider. That's quite a different option to the alternatives listed above, but it might be more appropriate for some buyers.

Personal loans

Buying a car with a personal loan involves borrowing the funds from a bank, building society or other lender, so the dealer has no involvement in financing and you effectively become a cash buyer.

That means you don’t have to negotiate, or even deal with, the finance side of things when you buy the car. It’s only the price of the car itself you have to worry about, which can be appealing. Remember, you can use What Car?'s Target Price to make sure you're getting a good deal on that front.

You don’t need a deposit to buy the car with a personal loan because you simply borrow as much money as you need. That means your monthly payments will be higher, though, because you’ll have borrowed a larger amount of money. Interest rates for personal loans are often higher than those offered by car makers, too.

One of the big benefits of buying a car with a loan is that you won’t be restricted by mileage limits, which are often part of car finance contracts. And because you’re treated as a cash buyer, you don’t have any ties to the dealer or manufacturer after you’ve bought the car so you can use it as you see fit – and even sell it if you want to. You’ll still have to pay back the loan, though.  

Consumer loans usually take one of two forms: secured and unsecured. A secured loan means the lender will use some sort of asset as security in case you can’t pay back the loan – usually your home – and they can repossess the asset if you fail to make the payments on time. Unsecured loans don’t use anything as security, but their interest rates are higher as a result.

It can be tempting to take out a long loan to keep the monthly payments low, but remember: the longer the loan lasts, the more interest you’ll pay, and the more you'll pay overall.

To help you to find the right deal for you, What Car? has a car finance comparison tool that lets you compare more than 300 products from 15 different lenders, all in one place.

Car finance

Personal loans might sound straightforward, but there are plenty of reasons to go for car finance – not least that it’s usually cheaper. Yes, you normally have to pay a deposit, but that means you’ll borrow less money, so your monthly repayments will be lower.

Dealers like it when customers sign up to their car finance plans because they make more money and a lot of buyers sign up for another contract when the first one runs out. They’ll frequently get in touch well before your initial contract ends and offer to swap you over to a new car if they can, which keeps you signed up for even longer.

As a result, they offer very competitive finance deals, often with lower interest rates than you’d get with a personal loan of a similar amount, and that further reduces the monthly cost.

The downside is that many car finance contracts include mileage limits, and you’ll have to pay a premium per mile if you exceed them. You also don’t fully own the car until you’ve paid off all the finance, and it's not always easy to get out of the contract early without paying a termination fee.  

Some types of car finance are more flexible than others. Our car finance guide explains the most popular forms, so you can see exactly what’s what with each one.   

Whichever form of finance you choose, make sure you understand exactly how much you will pay – both every month and overall – and the precise terms and conditions of the contract. Any company issuing consumer finance, whether it's a car dealer or a bank, is legally required to publish the annual percentage rate (APR) and provide customers with a clear breakdown of the costs, so make sure you have these before you sign up.

If you are considering buying a car on finance, be sure to visit our free New Car Buying service, where What Car? approved dealers can provide you with personalised finance offers.

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