Personal car loans explained - Car Finance Guide

There are lots of different ways of buying a new or used car. Here we look at the pros and cons of taking out a personal loan...

Quick guide to car finance

What is a personal loan?

A personal loan is an amount of money that you borrow from a bank or other finance provider and then pay back, with interest, over an agreed number of months.

Interest rates on personal loans can be as low as 2-3%, so they can be a more affordable way of paying for a new or used car than hire purchase or personal contract purchase, especially if you want to keep the car at the end of the agreement.

They’re generally not secured on a large asset, such as your home, so you won’t lose your house if you run into trouble and can’t meet the payments. If you have a poor credit rating, though, this makes them harder to get than other forms of car finance. 

How does a personal loan work?

First, find the car you want to buy and agree a price for it so you know how much you need to borrow. Then check interest rates so you can get the best deal; rates will be higher for smaller loans and lower for larger ones, so you’ll need to find out the rate that applies to your required amount.

The interest rates advertised by finance providers are representative APRs; only around half of people applying for the loan will get this rate, while the others will be offered a higher rate. Once you’ve chosen your loan and applied for it, the money will be transferred into your bank account and you can buy your car.   

What happens at the end of a personal loan agreement?

At the end of the agreed term, the payments stop and the car is yours. 

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Personal loan advantages

1. You own the car as soon as you pay the seller for it, so if you want to modify it or need to sell it, you’re free to do so without the worry of incurring any penalties.    

2. Although the monthly payments are higher than those of a personal contract purchase (PCP) deal, there’s no large fee to pay at the end to buy the car outright.   

3. Personal loan interest rates are generally lower than those for hire purchase finance, so you’re saving money. However, some PCP deals have big financial incentives, such as manufacturer deposit contributions and 0% interest rates, so buying on PCP could be the cheapest option overall. 

Personal loan disadvantages

1. You might not qualify for a personal loan if you have a poor credit rating. If you do, you're likely to be offered a loan with a very high interest rate; some loans to people with bad credit ratings have APRs of around 50%. 

2. The monthly payments will be higher than those of a personal contract purchase or personal contract hire deal. 

3. Car makers and dealers earn money from customers who take out their finance deals, so your negotiating power may be reduced if you’ve sorted out your own finance. 

Where can I get the best personal loan deal? 

There are a bewildering number of companies offering personal loans, so check comparison websites and money advice sites to find out which is offering the best rates. 

Personal loan FAQs

How can I keep the monthly repayments low? 

The best way to minimise the cost of a loan is to find one with the lowest interest rate. You could also consider putting a larger deposit down on the car so that the amount you need to borrow is less. 

Personal loans can be taken out for between one and seven years, so if you need to keep the monthly payments low, choosing a longer loan period will help to do this, although you'll end up paying more interest.

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

And, of course, if you're paying less for your car, you won't have to borrow so much, so visit our new car buying service for a range of great deals from What Car? approved dealers who are guaranteed to match or beat our Target Price discount. 

Can I pay a personal loan off early? 

You can settle your loan at any time, but while some lenders will let you do this for free, most will charge a fee, usually of one or two months’ interest. Contact your loan provider to find out the exact amount you’ll need to pay to settle the loan in full. 

What if I miss a personal loan payment?

Just missing one payment or making it later than you should won’t be a big problem, but if you keep missing payments, the lender will mark you ‘in default’, and this will affect your ability to get any further credit. Contact the lender as soon as possible if you’re unable to make payments, because you might be able to agree on a payment plan with them rather than them taking the matter further and asking the court to allow bailiffs to seize assets to cover your debts. 

What happens if interest rates change?

Personal loans are virtually all offered at a fixed interest rate, so any changes in the base rate of interest won't have any affect on your payments. 

Do I get Section 75 cover with a personal loan?

Provided you pay at least £100 towards the cost of a car on a credit card, you’ll be protected by Section 75. This makes the credit card company jointly liable with the finance company if something goes wrong with the car.

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