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Car finance ›
Car finance vs personal loan: which is best?
Updated: Tuesday, 2 January 2024
So, you’re looking to buy a new car. But which is better: car finance or a personal loan? While both options help to spread the cost of a car over time, they’re actually very different.
Whether you’ve got your eye on a new car or are simply planning ahead, it’s essential to know your options before making a purchase. It can be confusing trying to decide which route to go down, but our handy guide will help to determine the best possible option for you.
What is a personal loan?
A personal loan allows you to borrow money from a bank or another lending company.
You will receive the loan in a lump sum which you can use as you like. You will then repay that amount, plus the interest, over an agreed period of time.
A personal loan usually has a fixed term set by the lender, which is usually between 12 and 60 months. This term is known as the repayment period and is the allotted time you have to pay back the amount you borrowed, you would usually do this by making monthly repayments.
If you agree to a longer repayment period, your monthly repayments are typically lower, but you might end up paying more interest because of the longer repayment period. A shorter repayment period usually means higher monthly repayments as you’ll repay the full loan over a shorter time span. With this, you might end up paying less interest because of the shorter repayment period.
Once you’ve received your loan, you can buy the vehicle directly from the private seller or car dealer, and you’ll legally own the car. As the legal owner of the car, you can modify the car how you want, and you can also sell or trade in the vehicle at any time.
Personal loans are usually unsecured, and if you are unable to make the repayments, it will likely impact your credit score. The lender may also take further action like getting a CCJ against you, or passing the debt onto a debt collection agency.
Let’s explore the advantages and disadvantages of using an unsecured loan to buy a car:
Pros of personal loans for buying a car
- You will receive a lump sum which you can use how you like
- You can purchase the car from a private seller or dealership of your choice
- You’ll have full ownership of the vehicle, and can modify, sell, or trade it in.
Cons of personal loans for buying a car
- If you have a poor credit score, or no credit history, you may struggle to get approved for a personal loan as most have strict lending requirements
- Self-employed people might be rejected as they can be seen as high risk, due to their changing monthly income
- If you can’t afford the monthly payments, you may have to sell the car or cover the loss from your own pocket.
What is car finance?
Car finance is an umbrella term that covers different methods for financing a car purchase. The most common types include Conditional Sale (CS), Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Contract Hire (PCH) also known as leasing.
Instead of you buying the car from the dealership, a lender will purchase the car for you. Then, you will repay the lender monthly until the finance has been fully repaid. You might need to pay a deposit, but depending on your circumstances and the type of finance you choose, you may be able to get car finance with no deposit.
Whether you fully own the car at the end of the agreement, or whether you must hand it back to the lender, depends on the type of car finance you choose. Some finance options require you to pay a fee to legally own the car, but not all, so make sure you understand the type of car finance you are agreeing to.
Unlike a personal loan, car finance is secured. This means that you need to keep up with your monthly repayments, if not the lender may repossess the vehicle.
There are several types of car finance:
- Conditional Sale (CS): the vehicle will be registered in your name, and you’ll have full use of the vehicle for the duration of the agreement. Once all repayments are made, you will legally own the car. This is the type of finance we offer, if you’d like to learn more, visit our guide explaining what CS finance is.
- Hire Purchase (HP): you repay the lender until you’ve made your repayments in full. At the end of the Hire Purchase agreement, you can fully own the vehicle by paying the “option to purchase fee”.
- Personal Contract Purchase (PCP): you pay an initial deposit and take out finance to cover the depreciation of the car. A PCP agreement has a ‘balloon payment’ or a lump sum which is owed to the lender at the end of an agreement. You can either pay this amount to keep the car, return the car, or trade in the car and start a new PCP plan on a new car.
- Personal Contract Hire (PCH): also known as car leasing, this allows you to lease a vehicle for a set time. You will usually pay a deposit, followed by fixed monthly payments. At the end of the agreement, you must return the car to the lender
Pros of car finance
- Car finance lets you spread the cost of a new car over an agreed time period, usually 36-60 months
- You may have the option to own the car outright at the end of the agreement. This can be either once you’ve made the final repayment like with CS finance, or once you’ve paid a fee like with HP
- You could get a new car more often, especially with PCP and PCH agreements.
Cons of car finance
- You don’t legally own the vehicle until the end of the agreement, or not at all if you have a PCH agreement
- You can’t sell, trade, or modify the financed car during the agreement
- Some car finance agreements like PCP have a maximum mileage limit and you may be charged if you exceed it
- The lender can repossess the vehicle if you fail to make payments.
If you’re looking to figure out which type of car finance is right for you, find out more in our guide – car finance explained.
Personal loans vs car finance: what’s the difference?
Purpose of the loan
When you take out a car finance agreement, you can only use the finance to purchase a vehicle. Car finance lenders have different lending criteria that the vehicle must meet. For example, you may need to purchase the car from a list of approved dealers, and there may be maximum age and total mileage limits.
On the other hand, personal loans provide you with a lump sum of money, often from a bank, that you can use at your own discretion. This might be purchasing a car, but it isn’t limited to this. You might use some of it to purchase the car, and some to pay for other costs like insurance and tax. However, the lender likely won’t have the knowledge or services to help you find the right car, whereas car finance lenders can help guide you through the car buying process.
Secured vs unsecured loans
Car finance is secured, so if you don’t meet your monthly repayments, it will impact your credit score and the lender has the right to repossess the vehicle. This is because the lender is considered the vehicle’s legal owner until you have paid the car finance amount in full.
On the other hand, personal loans are typically unsecured. If you take out a personal loan but can’t meet your agreed repayments, this will impact your credit score and may make it more difficult to obtain credit in the future. There may also be legal consequences and action taken to recover the money owed, such as a CCJ.
Whether you take out a secured or unsecured loan, the lender has rights to take legal action if you don’t make the repayments. That’s why it’s important to take your time when buying a new car, think about your circumstances and see what’s affordable for you.
Interest rates
Banks that provide personal loans might offer a lower interest rate than a car finance agreement. However, they usually have stricter lending criteria and so you might find it difficult to get a loan if you have less than perfect credit.
The interest rate on your loan, or on your car finance agreement, will depend on your circumstances including your credit score and credit history.
If you have bad credit, you might be offered car finance but at a higher interest rate. This might be because you are seen as higher risk if you’ve missed repayments in the past or have an IVA or CCJ. This is why some lenders don’t offer bad credit car finance at all.
One factor that may improve your chances of getting finance is by increasing your credit score. If you’re looking to learn more about your credit score, then our handy guides will be able to help you:
Choosing between car finance or a personal loan
So, which is better for buying a car: car finance or a personal loan? It depends on your personal circumstances.
If you’d prefer to have full ownership of the vehicle from the start, then a personal loan could be better. This way, you can modify, sell or trade in the vehicle whenever you want.
Remember, if your credit score isn’t looking its best, then it may be more difficult to get a personal loan. On the other hand, car finance doesn’t require an excellent credit score and has fixed monthly repayments.
Affordability is the most important factor to consider when picking between different loan types. If you can’t keep up with your monthly payments, you’ll be in hot water either way. Make sure you research the different options you have, and don’t rush into making your decision.
FAQs
Is it better to get a personal or car loan from the bank?
Banks might be able to offer a personal loan at a low interest rate, however, personal loans can have strict requirements and criteria and it might not be possible to get approved if you don’t have an excellent credit score.
Is a personal loan the same as car finance?
No, they are different.
A personal loan is an unsecured loan that gives you a lump sum to purchase a car with. You then pay back the loan amount and any interest in monthly instalments. The criteria to get a personal loan is usually stricter and so you might not be eligible if you have less than perfect credit.
Car finance allows you to spread the cost of a new car over monthly repayments, usually over the course of one to five years. At the end of your agreement, you might have the option to fully own the car, but it depends on the type of car finance you have.
So, you’re looking to buy a new car. But which is better: car finance or a personal loan? While both options help to spread the cost of a car over time, they’re actually very different.
Whether you’ve got your eye on a new car or are simply planning ahead, it’s essential to know your options before making a purchase. It can be confusing trying to decide which route to go down, but our handy guide will help to determine the best possible option for you.
What is a personal loan?
A personal loan allows you to borrow money from a bank or another lending company.
You will receive the loan in a lump sum which you can use as you like. You will then repay that amount, plus the interest, over an agreed period of time.
A personal loan usually has a fixed term set by the lender, which is usually between 12 and 60 months. This term is known as the repayment period and is the allotted time you have to pay back the amount you borrowed, you would usually do this by making monthly repayments.
If you agree to a longer repayment period, your monthly repayments are typically lower, but you might end up paying more interest because of the longer repayment period. A shorter repayment period usually means higher monthly repayments as you’ll repay the full loan over a shorter time span. With this, you might end up paying less interest because of the shorter repayment period.
Once you’ve received your loan, you can buy the vehicle directly from the private seller or car dealer, and you’ll legally own the car. As the legal owner of the car, you can modify the car how you want, and you can also sell or trade in the vehicle at any time.
Personal loans are usually unsecured, and if you are unable to make the repayments, it will likely impact your credit score. The lender may also take further action like getting a CCJ against you, or passing the debt onto a debt collection agency.
Let’s explore the advantages and disadvantages of using an unsecured loan to buy a car:
Pros of personal loans for buying a car
- You will receive a lump sum which you can use how you like
- You can purchase the car from a private seller or dealership of your choice
- You’ll have full ownership of the vehicle, and can modify, sell, or trade it in.
Cons of personal loans for buying a car
- If you have a poor credit score, or no credit history, you may struggle to get approved for a personal loan as most have strict lending requirements
- Self-employed people might be rejected as they can be seen as high risk, due to their changing monthly income
- If you can’t afford the monthly payments, you may have to sell the car or cover the loss from your own pocket.
What is car finance?
Car finance is an umbrella term that covers different methods for financing a car purchase. The most common types include Conditional Sale (CS), Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Contract Hire (PCH) also known as leasing.
Instead of you buying the car from the dealership, a lender will purchase the car for you. Then, you will repay the lender monthly until the finance has been fully repaid. You might need to pay a deposit, but depending on your circumstances and the type of finance you choose, you may be able to get car finance with no deposit.
Whether you fully own the car at the end of the agreement, or whether you must hand it back to the lender, depends on the type of car finance you choose. Some finance options require you to pay a fee to legally own the car, but not all, so make sure you understand the type of car finance you are agreeing to.
Unlike a personal loan, car finance is secured. This means that you need to keep up with your monthly repayments, if not the lender may repossess the vehicle.
There are several types of car finance:
- Conditional Sale (CS): the vehicle will be registered in your name, and you’ll have full use of the vehicle for the duration of the agreement. Once all repayments are made, you will legally own the car. This is the type of finance we offer, if you’d like to learn more, visit our guide explaining what CS finance is.
- Hire Purchase (HP): you repay the lender until you’ve made your repayments in full. At the end of the Hire Purchase agreement, you can fully own the vehicle by paying the “option to purchase fee”.
- Personal Contract Purchase (PCP): you pay an initial deposit and take out finance to cover the depreciation of the car. A PCP agreement has a ‘balloon payment’ or a lump sum which is owed to the lender at the end of an agreement. You can either pay this amount to keep the car, return the car, or trade in the car and start a new PCP plan on a new car.
- Personal Contract Hire (PCH): also known as car leasing, this allows you to lease a vehicle for a set time. You will usually pay a deposit, followed by fixed monthly payments. At the end of the agreement, you must return the car to the lender
Pros of car finance
- Car finance lets you spread the cost of a new car over an agreed time period, usually 36-60 months
- You may have the option to own the car outright at the end of the agreement. This can be either once you’ve made the final repayment like with CS finance, or once you’ve paid a fee like with HP
- You could get a new car more often, especially with PCP and PCH agreements.
Cons of car finance
- You don’t legally own the vehicle until the end of the agreement, or not at all if you have a PCH agreement
- You can’t sell, trade, or modify the financed car during the agreement
- Some car finance agreements like PCP have a maximum mileage limit and you may be charged if you exceed it
- The lender can repossess the vehicle if you fail to make payments.
Personal loans vs car finance: what’s the difference?
Purpose of the loan
When you take out a car finance agreement, you can only use the finance to purchase a vehicle. Car finance lenders have different lending criteria that the vehicle must meet. For example, you may need to purchase the car from a list of approved dealers, and there may be maximum age and total mileage limits.
On the other hand, personal loans provide you with a lump sum of money, often from a bank, that you can use at your own discretion. This might be purchasing a car, but it isn’t limited to this. You might use some of it to purchase the car, and some to pay for other costs like insurance and tax. However, the lender likely won’t have the knowledge or services to help you find the right car, whereas car finance lenders can help guide you through the car buying process.
Secured vs unsecured loans
Car finance is secured, so if you don’t meet your monthly repayments, it will impact your credit score and the lender has the right to repossess the vehicle. This is because the lender is considered the vehicle’s legal owner until you have paid the car finance amount in full.
On the other hand, personal loans are typically unsecured. If you take out a personal loan but can’t meet your agreed repayments, this will impact your credit score and may make it more difficult to obtain credit in the future. There may also be legal consequences and action taken to recover the money owed, such as a CCJ.
Whether you take out a secured or unsecured loan, the lender has rights to take legal action if you don’t make the repayments. That’s why it’s important to take your time when buying a new car, think about your circumstances and see what’s affordable for you.
Interest rates
Banks that provide personal loans might offer a lower interest rate than a car finance agreement. However, they usually have stricter lending criteria and so you might find it difficult to get a loan if you have less than perfect credit.
The interest rate on your loan, or on your car finance agreement, will depend on your circumstances including your credit score and credit history.
If you have bad credit, you might be offered car finance but at a higher interest rate. This might be because you are seen as higher risk if you’ve missed repayments in the past or have an IVA or CCJ. This is why some lenders don’t offer bad credit car finance at all.
One factor that may improve your chances of getting finance is by increasing your credit score. If you’re looking to learn more about your credit score, then our handy guides will be able to help you:
Choosing between car finance or a personal loan
So, which is better for buying a car: car finance or a personal loan? It depends on your personal circumstances.
If you’d prefer to have full ownership of the vehicle from the start, then a personal loan could be better. This way, you can modify, sell or trade in the vehicle whenever you want.
Remember, if your credit score isn’t looking its best, then it may be more difficult to get a personal loan. On the other hand, car finance doesn’t require an excellent credit score and has fixed monthly repayments.
Affordability is the most important factor to consider when picking between different loan types. If you can’t keep up with your monthly payments, you’ll be in hot water either way. Make sure you research the different options you have, and don’t rush into making your decision.
FAQs
Is it better to get a personal or car loan from the bank?
Banks might be able to offer a personal loan at a low interest rate, however, personal loans can have strict requirements and criteria and it might not be possible to get approved if you don’t have an excellent credit score.
Is a personal loan the same as car finance?
No, they are different.
A personal loan is an unsecured loan that gives you a lump sum to purchase a car with. You then pay back the loan amount and any interest in monthly instalments. The criteria to get a personal loan is usually stricter and so you might not be eligible if you have less than perfect credit.
Car finance allows you to spread the cost of a new car over monthly repayments, usually over the course of one to five years. At the end of your agreement, you might have the option to fully own the car, but it depends on the type of car finance you have.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
