Are you looking for your next car and thinking about how best to pay for it – car finance or loan?
Unless it’s very cheap to buy, getting a car on finance is an ideal option for a lot of people who want to buy a car.
The next question is: what type of finance is best for you? Most people will choose to get a personal loan or take a car out on finance.
Car loans
A car loan lets you borrow a loan from a lender to buy a car. This means the car will be paid for upfront, but you’ll have to pay the lender back with added interest or fees.
The terms car loan and personal loan are usually interchangeable. Personal loans are usually unsecured unless secured against a property.
In this article, we’re talking about unsecured personal loans for buying a car.
Car finance
Car finance can mean hire purchase (HP), conditional sales, personal contract purchase (PCP), and personal lease, sometimes known as personal contract hire. In this article, we're focusing on hire purchase.
Unsecured v secured loans
With unsecured personal loans, you would own the car from day one.
Under hire purchase, the car is ‘secured’. This means, you’re essentially hiring the car from the finance company until you’ve made all the payments, including the final ‘option to purchase fee’.
While some people may worry about the car being repossessed under HP agreements, this can only happen if you can’t keep up with your monthly payments or break another term and condition.
They can only do this once they’ve followed a strict legal process.
It’s also worth pointing out that if a customer can’t repay an unsecured personal loan, the lender can try to recover the debt via court action or a debt collector.
The positive side of a HP agreement is that the security means it comes with a lot more customer benefits than a personal loan. This means:
- Customers may be more likely to have their credit application approved for HP than an unsecured loan, because it’s secured (this is subject to a customer’s credit record).
- The lender and the dealer are responsible for making sure the car is good quality given its age and condition – if there’s a problem with the car, they may be able to resolve it for you.
- Once a customer has paid half the total amount of their car finance, they can hand the car back with nothing more to pay if they want to 'voluntarily terminate’ the agreement. The car needs to be in reasonable condition.
Price (interest rates)
New cars may feature special finance offers, which can be hard to beat.
On the other hand, the headline Representative APR interest rates advertised by personal loan providers can be very attractive for customers with a good credit score.
But not all applicants will be accepted at the advertised interest rate. Interest rates for both options can vary depending on several factors, including the loan amount, repayment term, applicant circumstances, and your credit score.
HP rates can be competitive but because lenders have security over the car and so may be more likely to approve your application, the overall APRs tend to be higher than for personal loans.
Where can you buy the car from?
If you take out a personal loan you can buy your car from anywhere: a dealer, at auction or privately.
If you’re using hire purchase, the car will need to come from a recognised dealer who’s working with the lender you’re using.
Deposits and the amount that can be borrowed
With a personal loan you don’t need to put down a deposit.
With hire purchase it might be required, but it isn’t mandatory and could be covered by part-exchanging a previous car.
It’s also worth remembering that while you can take out a personal loan of up to £30,000 and sometimes more, this is usually only for people with high credit scores.
For HP, lending levels can be less restricted – but this still depends on the customer’s credit record.
How long can you spread the loan over?
Personal loans can be spread over up to seven years, whereas hire purchase is often limited to five years.
These terms might vary across different lenders though. You should consider how long you expect to keep the car to minimise interest payments.
Ownership
Unlike hire purchase, you can own the car from the start if you take out a personal loan.
However, you can’t return the car when you’ve paid off half the total amount or at the end of the agreement – but you’re free to modify it or sell it whenever you want.
So, which should you choose?
There are pros and cons to each option when considering the best way to buy a car.
While a low interest rate might be important to you, it could affect your credit rating or circumstances.
In this case, getting an acceptance might be a higher priority for you, and there’s value to the additional customer protection offered by HP.
Whatever route you choose, the most important thing to consider is affordability - always stick to a budget you can reasonably afford.
Our car finance options
You can find out more about hire purchase here.
Or, you can find out more about our car loans here.
