Is a bank loan better than dealer car finance?
A bank loan is a popular way of funding a car, but does it trump manufacturer and dealer finance?...
There are lots of options if you want to buy a car on finance, many of which are offered by manufacturers and dealers, such as 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 finance provider.
Again, this is quite different from the other alternatives, but it may be more appropriate for some buyers.
Buying a car with a personal loan involves sourcing 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. And 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 go up, though, because you’ll have borrowed a larger amount of money. Interest rates are often higher with personal loans, 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. Again, you’re treated as a cash buyer, which means 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 two forms: secured and unsecured. A secured loan means the lender will use some sort of asset as security if you can’t back the loan – usually your home – that they can repossess 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.
As straightforward as personal loans sound, 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 to successive contracts when their original ones run out. They’ll frequently get in touch well before your initial contract is up 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, which further reduces the monthly cost.
The downside is that many car finance contracts include mileage limits, and you’ll have to pay a premium if you exceed these amounts. You also don’t fully own the car until you’ve paid it off, so you can’t sell it until then.
Some types of car finance are more flexible than others. Our guide to car finance explains the six 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 – be it 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.
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