Is a personal loan cheaper than car finance in the UK?

Personal loans are cheaper than car finance deals when your credit rating is good and your income sources are strong. Subprime borrowers should always carefully compare deals.

If you are looking to borrow money for a car, you have two options: to have it financed from a car dealer or to take out a personal loan from a direct lender or bank. Both kinds of financing are different, and they have different upsides and downsides.  

 

What is an auto loan? 

A car loan is a personal loan that enables you to spread the cost of a car purchase over an extended period. Depending on the size of a car loan, the repayment length could be between two and five years. Car loans are available from banks as well as direct lenders.  

You can use personal loans to purchase a new as well as an old car. However, you must have a down payment. A larger down payment will reduce the loan-to-value, which means you will end up paying a smaller amount of money on interest.  

An ideal size of down payment is 10%. A larger deposit will reduce the loan-to-value ratio, which will be favourable for your budget in the long run. Whether you apply for a loan from a bank or a direct lender, you will receive a lump sum to purchase a car, and then you will pay it back in fixed instalments over a period of several months.  

How much you will be able to borrow, and at what interest rates, is largely influenced by your income and credit score. 

 

What is car finance? 

Car finance is available from car dealers. Normally, there are two types of deals: Hire Purchase and Personal Contract Purchase. You are required to pay back a fixed sum of money every month over a period of time. However, both kinds of car finance deals work differently.  

  • Hire Purchase works the same as personal loans. You borrow money to purchase a car that is paid back over a period of months. The title of the car will remain with the car dealer unless you settle the whole of your debt.  
  • Personal contract purchase is similar to hire purchase, but the monthly instalments will be smaller as they will go towards the depreciation of the car. At the end of the car, you have the freedom to give it back to the dealer or purchase it by making a balloon payment.  

If you do not like either financing option, you can simply choose car leasing, which enables you to use a car in exchange for a rent payment every month. You do not have an opportunity to own the vehicle after the end of the contract.  

 

Pros and cons of car loans 

Here are the advantages and disadvantages of car loans: 

Pros 

Cons 

Car loans are cheaper than car finance. You can qualify for lower interest rates if your credit score is stellar.  

Most of the lenders provide better rates only to good credit borrowers, and those with perfect credit histories prefer banks to private lenders.  

You own the car from the moment you sign the agreement. However, your lender will have the upper hand, but you can modify and use the car the way you want. 

It is time-consuming as you have to make all arrangements for financing and the car purchase. Sometimes, people find it a bit complicated and exhausting.  

You can use the loan to purchase a car from a dealer or a private seller. You can purchase a new car as well as a secondhand car using this money.  

This is not as flexible as car financing. You have no choice but to return the car at the end of the contract.  

  

Upsides and downsides of car financing 

Here are the advantages and drawbacks of car financing: 

Advantages 

Disadvantages 

Car finance deals are more flexible as you can decide whether to purchase it or return it.  

Car financing deals are expensive. PCP, for example, will cost you a lot of money and yet you have to pay the balloon payment to own the car at the end.  

They are more convenient. You do not have to arrange financing yourself. Dealers will make all arrangements.  

Car dealers may have restrictions related to the mileage. It will cost you a lot more money if the mileage exceeds.  

Since you will be paying down the borrowed sum over a long period of time, it will help improve your credit score.  

You might not own the car at the time of signing the agreement. Ownership is transferred at the end of the contract.  

Car financing deals are available for subprime borrowers as well.  

Subprime borrowers will end up with a lot more money. 

 

Which is cheaper – car finance or car loans? 

Personal loans are cheaper than car financing deals. HP costs more money than personal loans, and PCP only lets you pay the depreciation. If you try to own the car at the end, it will cost you a lot more money.  

However, if you try to take out unsecured personal loans for bad credit, it would be hard to say that personal loans are cheaper than car financing deals. If you are unable to decide between the two types of financing, you should consider the following factors: 

  • Do you want to own the car? 
  • Do you need to replace your car every now and then?  
  • Have you considered other options, like borrowing from a bank? 
  • Have you analysed your credit rating and repayment capacity? 
  • Have you checked the pros and cons of all types of financing? 

 

The final word 

Personal loans may or may not be cheaper than car financing deals. If your credit rating is good, personal loans might prove to be a better option. However, if your credit rating is bad, you should carefully research to know which one helps save you money.  

You should always ensure that your credit rating and financial condition are strong. Try to arrange a larger deposit, even if your credit rating is good. It will reduce the loan-to-value ratio. This increases your chances of qualifying for personal loans or car finance deals at lower interest rates.