Getting a personal loan for a used car

What is a personal loan for a car?

If you’re looking to borrow money to buy a car, lenders may offer you one of two options: a personal loan or a loan designed for buying a car.

You can use a personal loan for many different things, whether it’s home improvements or paying for a wedding. Banks, building societies and supermarkets often market personal loans to car buyers by referring to them as ‘car loans’.

But in reality, a personal loan is an unsecured loan that you can spend on anything you like. If you’re planning to take out a loan to buy a car, it’s worth comparing the cost with car finance schemes from dealerships and other lenders.

You might also find that banks offer specific car loans. Unlike a personal loan, these are secured loans and can only be used to buy a vehicle. This means if you don’t keep up your repayments, the lender could repossess your car.

Buying a car with a personal loan means you’ll own it straight away – unlike with car finance.

How does a personal loan for a car work?

With a personal loan for a car from a bank or other lender, you’ll borrow an agreed amount of money for a set time period. This amount is transferred directly to your bank account and you’ll pay it back in monthly instalments, at a fixed interest rate.

The interest rate you receive will depend on your credit score. You could reduce your car loan’s APR (annual percentage rate) by fixing any errors on your credit file, as well as shopping around for the right deal.

What are the pros of borrowing money for a car?

Getting a personal loan to buy a car has several benefits:

Affordability – personal loan interest rates could be lower than those for car finance. You’ll also be able to compare loans so you know you’re getting the right option for you.

Flexibility – you can spread your repayments for up to seven years without having to secure the loan against an asset like your home. Remember, the longer you have the loan, the more interest you’ll pay.

Outright ownership – you’ll own the car from day one. That means you can make modifications or sell it if you want to.

What are the drawbacks of taking out a loan for a car?

Disadvantages of taking out a loan for a car include:

Needing a good credit score – without a good credit score, you won’t be offered the best interest rates. If you have a bad credit score, lenders may reject you altogether. But if that’s the case, you’ll face similar issues with hire purchase, personal contracts hire and personal contract purchase plans.

No special offers – you’re likely to miss out on the incentives manufacturers offer when you take out their finance.

Upgrade inconvenience – if you regularly buy a new car, contract purchases – a type of car finance – often let you trade up more easily. With a loan, you’ll have to trade in your car and go through the process again.

Personal loan vs car finance – which is best for me?

Personal loans and car finance can be a bit of a minefield, but it’s important to understand the options to get the right deal for you. You’ll need to consider what matters most – whether that’s your monthly payments or whether you own the car outright.

Car finance plans include hire purchase and personal contract purchase. These usually involve putting down a deposit and paying for the car in monthly instalments.

Personal contract purchases give you the option to hand back the car at the end of the agreement. Alternatively, you can part-exchange your car or buy it outright with a one-off ‘balloon payment’. With hire purchase contracts, you own the car once you’ve made all the payments.

There are also car leasing plans that let you rent a car for an agreed period.

You can also compare car finance with us to see which is the best option for you.

Always compare personal loans with car finance plans. Before making a decision about whether to take out a car loan, ask yourself:

Do you have a good credit score?

Do you have enough savings for a deposit?

How much can you afford to pay back each month?

Do you want to own the car outright?

Are you likely to change your car again before you’ve paid off the loan?

Understanding the Impact of Your Credit Score

Your credit score plays a crucial role in determining the interest rate of your personal loan. Lenders assess your creditworthiness based on your financial history, including previous loans, credit card usage, and payment timeliness. If your score is high, you may qualify for lower rates, saving you money over the loan's duration. Conversely, a poor score might result in higher rates or outright denial. It's advisable to check your credit report regularly, address any discrepancies, and work on improving your score before applying for a loan, ensuring you get the best possible terms for your vehicle financing.

Navigating the Car Buying Process

When you've decided to finance a car with a personal loan, understanding the buying process is essential. Start by researching the market value of the models you're interested in, comparing prices across various dealerships and online platforms. Once you identify the right car, negotiate the price, keeping in mind that having a loan pre-approved can give you leverage. This pre-approval process not only establishes a budget but also simplifies your purchasing power. Additionally, always factor in the total cost of ownership, including insurance, maintenance, and fuel, to ensure your new vehicle fits within your overall financial plan.