Car finance vs personal loans

Written by

Sophie Venner

Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.

Monday 20th February 2023

So you’re all ready to pick out your perfect car, but you need to figure out the best way to pay. Should you go with a car finance product offered by the dealership, or get a car loan lined up to help you pay for your vehicle upfront?

In this article, we explain the difference between car finance and personal loans so you can make the best choice for you.

What is the difference between car finance and a car loan?

Both car finance and car loans give you access to the funds you need to buy a vehicle. Car finance is offered on specific cars by dealerships, whereas a personal car loan is provided by a personal loans provider.

When you take out a personal loan, the money you need is deposited straight into your account in one lump sum. You then pay this back by making monthly repayments to the personal loans company.

Car finance works slightly differently. Whether you choose personal contract purchase (PCP), hire purchase (HP) or even personal contract hire (PCH), you’ll be essentially hiring your car for the duration of the term. Whether you’re given the option to buy the car at the end of your term depends on the finance product you choose.

Using a personal loan to buy a car

When you take out a personal loan to buy a car, you’re given the money you need to buy your car outright. You can choose what car to buy and where to buy it from – and you could even borrow a bit extra to help pay for additional expenses such as car accessories or insurance.

Your chosen car loan provider will decide whether or not to lend money to you based on your personal and financial circumstances, credit history, loan amount and term.

As a car loan is unsecured, your car won’t be put up as collateral and can’t be repossessed if you fail to keep up with your repayments. If you do miss or make a late payment, though, it will be logged on your credit record which could make it more expensive or even impossible to borrow in the future.

Benefits of car loans

Disadvantages of car loans

The car is yours from the outset, so you:

  • Don’t need to worry about mileage or usage restrictions
  • Won’t incur costs for damage to the vehicle (if it’s just a small scrape you don’t want to repair)
  • Won’t need to pay any final fees or balloon payments

Not everyone will be accepted for a car loan, and you’ll need to meet stringent eligibility criteria (in our case, you must be aged 21 and over, be a permanent UK resident, have an income greater than £10,000, be in permanent paid employment or retired with a pension, and have a good credit history)

You won’t need to put down a deposit

You’ll be responsible for all car maintenance, servicing and repairs as you’ll own the car outright

The APR charged may be lower than the rate offered by the car dealership

If you sell your car or it’s written off, you’ll still be responsible for the loan repayments

Your car won’t be used as collateral, so it can’t be repossessed if you fail to keep up your repayments

Your monthly repayments may be higher compared to some finance options, as you’ll be paying the full value of the vehicle

There’s no deadline on choosing your car – with the money in your account ready to go, you can take your time searching for your dream wheels

Your car’s value will depreciate, so there could be a big difference between the amount you originally paid for it and how much you can sell it for

Buy any car within your budget, whether you want to purchase a new, used or electric model

There might be a few days to wait for the funds to come through, so plan in advance before car shopping

Purchase from a private seller or a dealership without restrictions

Borrow a bit more to pay for the initial costs such as insurance and car tax

The interest rate will remain fixed throughout your loan term. This means your repayments will be the same each month, helping to manage your outgoings

You’ll essentially be a cash buyer, which could help you negotiate a good deal on your next car

Swap your car as often as you like or keep it for years – the choice is yours!

You could borrow over a longer period of time (remember, though, that the longer the term the more interest you’ll pay overall)

If you have some money saved up, but not quite enough to buy your dream car, a personal loan could help to top up your funds

There are a few added benefits of a car loan if you choose Novuna Personal Finance, including:

  • Borrow up to £35,000 to get the car of your dreams
  • It’s quick and easy to apply for online – get an instant decision and (if accepted), once you’ve signed your agreement the money could be with you in just two working days
  • Spread the cost over 2 to 7 years
  • No upfront fees, arrangement fees or hidden charges
  • Easy to make extra payments or settle your loan early
  • Manage your car loan online or via the app, so you have full control at your fingertips
  • You can choose your repayment date each month to help you better manage your outgoings

Using car finance to buy a car

Using car finance to buy a car is often considered a cost-effective way to get your hands on the vehicle you want.

Normally offered directly by car dealerships, car finance offers the opportunity to essentially hire a car until the full amount is paid off (unless you lease a car, in which case you’ll have no option to buy at the end of your term). We explain the different types of finance below:

  • With Personal Contract Purchase (PCP) finance, you’ll make fixed monthly payments to pay off the depreciation of the car (which makes the monthly repayment lower as you are not paying off the full cost of the car). At the end of your term, you will be given the option to swap your car for a new one (alongside a new PCP contract) or there’s an optional balloon payment which you pay and will allow you to keep your car.
  • Hire Purchase (HP) plans give you the option to make monthly instalments to pay off the full value of your car. Once you’ve made your final payment, you’ll have the option to trade your car in for a new one (on a new HP contract) or become the legal owner of your car by paying a final fee.
  • Personal Contract Hire (PCH), commonly known as car leasing, is basically a form of long-term car rental, with servicing and maintenance costs usually included in the monthly fee. There will be no option to buy your car at the end of your contract.

Benefits of car finance

Disadvantages of car finance

Your monthly payments will likely be lower, making buying a car more affordable

You’ll need to buy your car from the dealership offering the car finance product, which could limit the type of car you can buy and from where

As monthly payments might be cheaper, you could have access to a range of more expensive cars that otherwise you might not be able to afford

You won’t own the car outright. Some finance products offer the option to buy your car at the end of your term, though

No need to worry about how you’re going to re-sell your car as you’ll be able to choose a new one from the car dealership at the end of your term

There may be mileage and usage restrictions

Upgrade your vehicle regularly, so you’re always driving the model of your dreams

If there is any damage to your car, you’ll need to pay for this to be repaired at the end of your term

Servicing and maintenance packages are sometimes included. If you choose a new car every three years, for example, you won’t need to worry about MOTs and your car warranty is likely to cover most major issues

There’s little flexibility if you want to change cars or alter your contract in any way until you’ve settled the finance

You’ll know how much you need to pay each month for the duration of your contract, helping you to plan your finances

You’ll need to find the money for a deposit

Some types of car finance – particularly Hire Purchase – are suitable for those with poor credit history, making this an accessible option if you have a low credit score

Your car could be taken away if you don’t keep up with your repayments

You’ll have greater protection if something’s wrong with your car, as opposed to buying it from a private seller

If you have some money to put down as a deposit, you could bring your monthly payments down significantly

Is a personal loan cheaper than car finance?

If you’re looking for the cheapest option overall, a personal loan can sometimes work out cheaper than car finance, mainly if you have a good credit history and are therefore offered lower interest rates.

51% of customers will receive the same as (or lower than) a lender’s representative APR. So, if you’re one of the 51% of people offered a lender’s best rate this could be cheaper than the interest rate offered on your car finance. If you have a poor credit history, though, this could make it harder for you to get a personal loan and it could certainly mean you’re offered higher interest rates. In this case car finance could be a cheaper option.

When you buy a car using a loan, you are paying for the full amount of the car’s value, and you’ll own the vehicle outright from the get-go. This could work out cheaper in the long run compared to taking out car finance and then having to find the extra money for the final fee or balloon payment.

You should also consider how much cash you’re prepared to part with as a deposit. Your monthly car finance repayments might be cheaper if you put up a hefty deposit but think carefully about what impact this will have on your finances.

As you won’t need to put up a deposit when taking out a personal loan, you could keep your nest egg intact.

However, if your priority is cheap monthly payments, then a PCP plan is likely to be the best option for you – particularly if you’re planning to hand over your car or swap it for a new one at the end of your term. Monthly PCP payments are often cheaper as you’re only paying for the depreciation of the car, rather than its full value. This is why the balloon payment at the end of the term is often so high.

Are there other ways to pay for my car?

There are five main options when buying your car: Personal Contract Purchase, Hire Purchase, car leasing, buying outright or taking out a loan.

  • Personal Contract Purchase and Hire Purchase are both types of car finance, allowing you to essentially hire your car from the lender until your term comes to an end or your car is fully paid off (either by paying a balloon payment or a final fee).
  • Leasing a car (sometimes known as Personal Contract Hire) is a form of long-term car rental – you’ll need to give up your car at the end of the term, with no option to buy.
  • A car loan gives you the option to buy your car outright by borrowing the full sum of money upfront, and then paying it back to the lender over a series of fixed-rate monthly instalments.
  • Paying for your car outright gives you the ultimate flexibility and prevents you paying any interest but saving up a large sum of money upfront can take time and not everyone wants to chip into their nest egg to pay for a car.

What is a personal car loan?

Apply for a Novuna Personal Finance loan in just minutes and get an instant decision. Borrow between £1,000 and £35,000 at rates from as low as 7.4% APR Representative (£7,500-£25,000).