Personal Loan For a Car

If you're looking to buy a car, a personal loan could be an option to help you manage the costs and not pay for everything in one go.

If you're in the process of buying a car and are unsure how to afford it, Car Credible is here to help make that decision a little bit easier for you, so you can be sure that you get what you want most affordably.

Buying a car is one of the most expensive purchases; it's important to completely understand what you want and the budget you have to play with.

While buying a car upfront with cash can have benefits, it also eats into your savings which could come in handy later on. It's unsurprising that 90% of new cars get bought using some form of finance plan.

Do you have a car on finance and would like to reduce your monthly repayments? Sign up with Car Credible today; we could help you save money on your deal.

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There are quite a few finance options to choose from, and it can be tricky to know where to start. The two most popular types of car finance are Personal Contract Purchase (PCP) and Hire Purchase (HP). There are plenty of pros and cons for both options.

An alternative is a personal loan, and in this guide, we explore all of the positives and negatives of a personal loan, how it differs from car finance, and why it could be the next best finance option for you.

What is a personal loan?

When buying a car, you may be offered two types of loans from your lender; traditional car finance or a personal loan, which you can technically use to buy anything you want.

A personal loan isn't restricted to buying a car. You could take out a personal loan to pay for a holiday, a wedding or improve your home. It is becoming increasingly more common when buying a car, though.

A personal loan is an unsecured loan. It means you can borrow money from a lender without offering up your home or other assets as collateral.

When you take out a personal loan to buy a car, you own the vehicle outright from the get-go, meaning you can do whatever you want without being restricted by finance lenders from owning it until you have made your final payments.

How does a personal loan work?

You could get a personal loan from your bank, making it a relatively seamless process as it can be done online, and they already have a record of your financial history. Of course, you are not restricted to just taking out a personal loan from your bank.

You will apply to borrow a sum from your lender over an agreed period which you will repay in fixed monthly instalments. It's a similar concept to traditional car finance, except you already own the vehicle.

The rate offered will depend on your credit score, so it may be worth tracking your credit score and applying for a personal loan when it's in good condition, to ensure you aren't paying more interest than you would like.

If you have savings, you could use some of that to put towards the cost of the car, meaning you can borrow less from your lender, which will reduce your monthly repayments.


What are the benefits of buying a car with a personal loan?

There are three main benefits to buying a car with a personal loan.

Owning the car outright

Owning the car outright from the beginning can be a significant reason for taking out a personal loan over traditional car finance. It means you can control everything that happens with the car, from modifications to annual mileage; even selling it after a year if you wanted.

Better value for you

It's common for personal loan interest rates to be lower than traditional car finance. You also have the option to view multiple rates rather than be at the mercy of a dealer who likely only has one rate available for you.

It's in your hands

You can choose how long you want the loan without going through a pushy car dealer. As you won't be securing the loan against an asset, you have more flexibility in what you can do with your loan.

What are the negatives of buying a car with a personal loan?

However, like everything, there are also some negatives to buying a car with a personal loan.

You have to sell it yourself

Owning the car outright from the start can be a positive and a negative. If you had car finance, you could upgrade your car relatively easily and regularly, meaning you always have the best make and model available. 

With a loan, if you want to get a new car, you have to sell your car yourself, which isn't the end of the world, but it can be an extra hassle for you, particularly if you are not getting the price that you think your vehicle is worth.

No deals or discounts

When you buy a car on finance through a dealer, they will often offer you added incentives and extras for the vehicle you are buying. With a personal loan, because you are buying outright via a loan not offered by them, they will be less inclined to give you any deals or discounts.

Credit score is more critical

With a personal loan, if your credit score isn't good, it's likely you won't get offered the best deals advertised. Your credit score gets scrutinised if you take out car finance too, so you should aim to have it in a relatively healthy place before applying for finance.

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Personal loan v car finance

It can be tough to know whether personal finance or car finance is best for you when buying a car. It all comes down to what suits your needs, budget and circumstance best.

With traditional car finance options like PCP and HP, you will generally expect to put down a deposit followed by monthly repayments for a fixed term, usually 24-60 months.

At the end of a PCP, you have three options. You can hand the car back, part-exchange your vehicle and get into something new, or pay the optional final balloon payment to own the motor outright.

With HP, on the other hand, you will own the car outright once you have made your final payment at the end of your deal. It's a good option for someone that knows they will want to own the car when their deal is up, but it could mean paying a little more in monthly repayments than PCP.

It's due to PCP having the balloon payment at the end of the deal, which doesn't get included in the amount you repay on the cost of the car across the agreement.

Before deciding, you should evaluate the amount of money you have in savings, what you could realistically afford, and whether you wish to own the car outright at any point.

If you can answer those three questions, it will give you a better understanding of what you want. You should research all available options and identify what is best for you.


Can I pay back my personal loan early?

You are able to repay your personal loan early if you have money available to you that you can afford to use. Doing this will save you money on interest that you would have had to have made, though there may be an early repayment charge to consider. Speak to your lender before proceeding with any action.

What support can I get if there are issues with my car?

If you take out a personal loan, buy the car outright and later identify an issue with the car, it's unlikely your lender will be able to help you. A personal loan can be used to buy anything, not just a car, so your lender has no obligation to assist in this situation. To protect yourself, take out the best insurance policy to help cover any unwanted costs.