Car Finance v Personal Loan

In this guide we look at the advantages and disadvantages of taking out a car finance deal vs a personal loan.

Whether you want to take out a car finance deal or a personal loan to pay for your new car, it's good to know beforehand the pros and cons of each option to get the most out of your budget.

Although both involve borrowing money to make repayments, they differ, and whichever route you go down could be the difference between you owning the car outright from the beginning or never owning it outright at all.

Car finance can be overcomplicated as there are a few different financing options available depending on your preferences. Personal Contract Purchase (PCP) and Hire Purchase (HP) are the two most popular and widely offered.

Do you have a finance deal already? Let us assess your deal, and we will tell you if you could be in a position to switch or save money.

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A personal loan is a little more simplified and can be done with your bank or online lender. This option is best for someone with a strong credit score, as rates will be much lower.

We'll assess both car finance and personal loan options, with their positives and negatives, so you can make a decision on the best way to buy a car for you.

Car finance vs personal loan

Taking out a personal loan from a bank means that you get given a lump sum of cash from your lender that you then use to pay for the car to own outright. From there, you can decide how many months you want to take to make your repayments at a set interest rate.

It's a great option for those that know they want to buy a car and own it from the start. It's also good for those that know they won't be changing their vehicle anytime soon, so if you choose this option, do all the research on the car before buying it.

The interest rate on a personal loan depends on an individual's credit score. If you have an excellent score, you can expect to pay less than someone with a poorer score. 

If you wish to take out car finance, you will generally have to put down a deposit (typically 5%-10% minimum) and then make fixed monthly payments throughout your agreed term.

Depending on the type of car finance you have, you will either own the car outright or have the option to make a final balloon payment (PCP deal). If you decline, you can hand the car back and walk away.

What to expect with car finance

  • Pay a deposit, then fixed monthly payments for an agreed term (usually 12-60 months).
  • Car finance is a great option for those whose credit score isn't outstanding.
  • At no point do you own the car outright while making payments, but you could do it at the end, depending on your agreement type.
  • There's no need to worry about depreciation if handing the car back at the end.
  • You need to agree to a set annual mileage at the start of your deal or risk penalties.


What to expect with a personal loan

  • You borrow an agreed amount of money and repay it over an agreed period.
  • An excellent credit score could give you a better deal and save you money vs a car finance deal.
  • You own the car outright from the beginning.
  • The vehicle will depreciate, therefore you could lose money.
  • You are responsible for the car's modifications, servicing, and future sales.

Pros of car finance

  • You can get a better, more expensive car because you can determine how long it takes you to pay it off.
  • The cost is spread out over several years rather than in one go.
  • The payments are fixed monthly, so you can plan and budget in advance.
  • You can drive a car on a tight budget.
  • You will improve your credit score, provided you can make each monthly payment without any issues.
  • There's no hassle to sell it if you're on a PCP deal.
  • When you wish to get a new car, you can use your current car as a deposit or part exchange, meaning you won't have to pay any of your cash out of pocket.

Car finance disadvantages

  • You have to pay interest, which you would on a personal loan too, but depending on your credit score, it may be higher.
  • You can't modify the car because you don't own it yourself.
  • It can be difficult to get out of the agreement.
  • You could be hit with mileage fees if you underestimate how much you'll drive in a year.
  • If you damage the car, it could cost you more than if you'd already paid in cash because the vehicle doesn't belong to you.
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Pros of a personal loan

  • Interest rates may be lower, especially if you have an excellent credit score.
  • You own the car outright from the beginning.
  • You're not restricted by who you buy your vehicle from or where.

Cons of a personal loan

  • An excellent credit score is required to get the best interest rates.
  • Your car will depreciate, and you could lose money.
  • Monthly payments may be higher than on a PCP.

Will car finance or a personal loan be better for me?

Each individual's circumstance is different and only you can decide what loan type is best for you.

If you have an excellent credit score, you may prefer to look into a personal loan. If it's poor through to good, car finance may be a better option.

It's important to do your research and budgeting to discover what is best for you and how much you can expect to pay over the term, including the deposit.


Can I get a personal loan and car finance?

If you already have car finance, you could take out a personal loan to pay off your early settlement figure to own the car outright. From there, you'd have no more car finance to pay, you'd just need to make your personal loan repayments.

What happens if I can't afford my car finance?

If you can't afford your car finance, you should contact your lender as soon as possible to discuss your options with them. If you've made over 50% of your payments, you could do voluntary termination and get out of your deal without having to pay a penny more.