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Whether you're buying a classic 2CV or a new Toyota hybrid, buying a car is a big investment decision. You may want to borrow some or all of the purchase price, to spread the outlay over a few years.
But there are so many kinds of car loan available - and everyone wants to sell you one! The car dealer has one offer, your bank another, and the motor magazines tell you there are even more options...
Feeling confused? We don't blame you!
Here on one web page we've put everything you need to know about how to finance your car. Let's get started!
Table of Contents
What is a personal car loan?
A personal car loan is a type of personal loan that you take out to buy a car.
Other kinds of car financing exist, for instance lease arrangements, hire purchase (HP), and personal contract purchase (PCP).
A personal car loan will usually allow you to spread the cost of buying your car over a period of one to seven years. You will own your car right from the start, which is different from what happens under a lease, HP or PCP contract.
You borrow the money to pay for your car from a bank or other financial institution - it doesn't have to be the bank you have your current account with - and you will then make monthly payments including interest on the sum borrowed, and repayments. Usually, you'll have a direct debit agreement so the money goes out of your account automatically every month. Some lenders will let you choose the day the money goes out so it's just after your payday.
Unlike a mortgage, the loan is not secured against your property or your car.
How do I apply for a car loan?
The other important question is: how does a personal loan for a car work?
Applying for a car loan is easy. Most lenders will let you apply by phone or online, and you can shop around to find the best loan deals.
Car dealerships often propose finance packages to their customers - but they may not have the best deals to offer. You'll need to fill in information about yourself - your name, address, job, and income - and the system will also look at your credit record through one of the major credit reference agencies. Lenders will make a decision within a few days - some of them in just a few hours - and will then transfer cash to your bank account, which you can use to pay for the car.
Having cash up front gives you a good negotiating position when you're trying to get the price down - or perhaps a few extras added free.
Remember that if you get a personal loan, the law gives you a cooling-off period of 14 days during which you can change your mind. That's 14 days counting from the later of two dates - when you sign the loan agreement, or when you receive a copy of it.
What are the best car loans?
The best loans, and the best place to look for them, vary depending on the type of car finance you are considering. Below, we've shown a selection of the best car loans available right now, but for a fully up-to-date list tailored to your particular circumstances and the amount you want to borrow, you should shop around.
Use our car finance calculator to work out how much you can borrow and then do a car loan comparison to see where you can get the best loan rates.
You can see from the table that if you've got a good credit record you can get rates as low as 2.9%. However, car loans with bad credit can be expensive - Aspire Money quotes an interest rate of 30.6%.
|2.9%||1 to 3 year period instant online decision you can choose which day of the month your loan payment should be made|
|3%||For AA members - non-members get a worse rate up to 7 years|
|3.2%||Up to 7 years|
|3.2%||Up to 7 yearsinstant decision and next day money|
|5.9%||3 years up to two month repayment holiday each year subject to approval|
|30.6%||High interest rate but will lend to adverse credit|
*For a loan of £15,500
What types of car finance loan are there?
Car finance comes in a number of different styles which have different advantages and disadvantages. The main forms you'll find are:
- personal car loans;
- Hire Purchase; and
- Personal Contract Purchase.
We've already talked about personal loans. Let's take a look at the other ways to finance cars.
What is a Leasing?
When you lease a car, you are basically renting it. You never get to own the car. You'll pay a set monthly amount for the term you have agreed, normally two to four years, and at the end of the period, you return the car to the leasing company.
Because the company takes the car back, there are conditions on how much mileage you can do and the condition of the car when you hand it back at the end of the lease.
If you have a lease and for whatever reason you no longer need the car, or can't afford the repayments, as long as you've made more than 50% of the payments you can hand the car back. This is known as Voluntary Termination.
Use our car lease calculator to work out if leasing is for you.
What is a Hire Purchase (HP)?
About 20 percent of new cars are bought using Hire Purchase and many dealerships promote HP to their buyers. As with a personal loan, you're basically borrowing money to pay for the car, but unlike a regular car loan, you won't own the car until you have finished paying. And the debt is secured against the car, so you can't sell the car - and if you don't pay your monthly dues, the finance company could repossess your car.
HP can be one of the best car finance deals as long as you can pay the deposit. Because you don't own the car till the end of the payment term, lenders are more lenient - if you have an impaired credit record, HP will be easier to get than a personal car loan.
A voluntary termination clause can also help you if you can't afford to keep the car. As long as you've paid more than half the amount of the HP package, you can return the car and walk away.
What is a Personal Contract Purchase?
With Personal Contract Purchase you have to pay an initial deposit and a series of monthly payments over a set term. You don't own the car, and have to hand it back at the end of the arrangement - but unlike a lease, you can decide to keep the car, and you'll then pay a final fee or 'balloon payment'. This fee is set at the beginning of the contract; the higher it is, the less your monthly payments will be, which makes PCP generally cheaper than HP in terms of the monthly payments.
A PCP car finance calculator will show you how the deal stacks up and allow you to compare it to other car finance deals.
Dealers will often promote PCP and you can also look online for the best PCP deals in the UK, but you do need to think about how you're going to pay that final payment if you want to keep the car.
Like HP and leasing, PCP gives you the right to Voluntary Termination. But because there's a balloon payment, you won't have paid 50% of your payments till much later in the life of the contract. That makes PCP less attractive if you think you might need to use Voluntary Termination.
|Do you own the car from the start?||Yes||No||No||No|
|Do you own the car at the end of the term?||Yes||No |
You have to hand it back at the end of the term
You either hand it back or pay extra to buy it
|Do you have to make a 'balloon' payment at the end of the period if you want to keep the car?||No||Not applicable||No||Yes|
|Do I have to pay a deposit?||No||No |
(but you may have to pay a few months in advance)
|Normally 10%||Normally 20%|
|How good does my credit record need to be?||Good||Adequate||Finance companies may be more lenient||Finance companies may be more lenient|
|Are there any conditions on mileage/condition of car?||No||Yes||No||Yes|
|Is the finance secured against the car?||No||Yes||Yes||Yes|
|Available on second hand cars?||Yes||No||Yes||Yes|
|Can I end the contract early?||Only by full repayment||Yes||Yes|
By handing back the car (if more than half the total amount has been repaid)
How much will a car finance loan cost?
Interest rates on car loans vary widely. Special offers can be at zero or very low rates, while some lenders offer loans at 6.9% all the way up to double figure interest rates, particularly for impaired credit or for smaller loans.
You really need to shop around to find low car interest loans.
Remember to look at the APR not just the headline rate, as this takes into account the interest rate plus any additional fees charged. While you might not get the APR if your credit record is less than excellent, it's a legal requirement that if a financial institution quotes an APR, they have to offer it to at least 51% of borrowers. That means it is a real price, not a "serving suggestion"! Low interest personal loans are a great way to finance your car purchase.
There may be penalties for early repayment, usually around 1-2 months' interest. Some lenders don't charge penalties, which might be useful if you work in an area where you might get a significant bonus and be able to pay off the loan early. (You can ask for a 'settlement figure' at any time showing how much you'd need to clear the loan.)
Note that unlike a mortgage, the loan isn't tied to the car - so you can change your car, if you want, and the loan will just carry on till it has been repaid.
Dealerships sometimes offer interest free car deals advertised as "0% finance". As you pay no interest, all your monthly payment goes to repaying the loan. What's the catch?
- Sometimes, dealers will increase the price of the car to make up for the interest payments. Check the list price with other dealers and on the internet before you buy.
- These deals may be restricted just to individual with excellent credit records, so not everyone will be eligible.
- Interest free deals sometimes demand a high deposit - that could be 40% of the price against 10% for other car finance deals (or zero with a personal loan).
- These deals are often targeted to shift unpopular stock. You might not get an interest free deal on the model you want.
That said, if you do get offered an interest free deal at the right price on the car you want, you'll be saving hundreds of pounds.
You'll also want to use a car loan calculator to see what your car loan will cost each month.
Can I buy any car with my car loan?
Because your loan is structured as a personal loan, you can use it to buy any car. Unlike PCP, HP and leasing it's not secured on or in any way tied to a particular vehicle.
You could buy a new car or a secondhand car, from a dealership, from an individual, or even from your employer's car fleet or from your best mate. You could also use a personal car loan to purchase a motorbike or a van.
What's particularly good about this it it means if you have narrowed down your choice to a couple of models, and you know roughly how much you need to finance the purchase, you can get your finance in place before you turn up to look at or test drive the car. That puts you in a very strong negotiating position.
How long do I need to to pay the loan back?
Most car personal loans run from one to five years. Some lenders will let you have a payment break of up to two months at the beginning of the loan, so your loan will effectively run for so many years plus two months. Remember, though, you'll be rolling up interest during this period so your loan as a whole will be more expensive.
What happens at the end of the car loan?
Because with a personal car loan you own the car from the start (unlike with leases or PCP contracts) there's no "balloon payment" to make. The lender simply marks your credit file with the information that the loan has been repaid in full. There is nothing left for you to pay.
However, you should remember that if you decide to change your car, or sell it, you'll still be liable for repayments on the loan. The same applies if your car is stolen, so you might want to ensure that your car insurance covers the full amount due, or take out gap insurance.
What is a good car loan rate?
The best loan rates start as low as 2.8% APR. If you are paying 4-5% you have done well. Of course, if you have impaired credit you may find you pay significantly more, if you can get a loan at all.
Car rates also depend on the size of loan you want to take out. It's a bit counter-intuitive - the less you borrow, the higher the rate. That's because the admin cost on a small loan is the same as on a larger loan, so the bank will make less profit (or even make a loss) if it charges the same interest rate.
For instance, you might find you have to pay as much as 8% interest on a £1,500 loan, while if you're borrowing £15,000 rates start as low as 2.8% APR.
It's a good idea to ask for several quotes and compare the best finance deals online. To make sure that this doesn't affect your credit record, check that the lender carries out a 'quotation search' or 'soft search credit check' which won't leave marks on your credit file.
How do I get the best car loan?
The number of one rule of finding the best car finance deals is: Shop around!
Use a car loan calculator to see what you can afford, then compare deals to find the best car loan rates before you make an application.
Check with your own bank, too. Sometimes banks reserve their best rates for existing customers, though it's not guaranteed that your bank will be able to beat other lenders to the best car loan rates.
You'll also get a better deal if you make sure your credit record is good. Pay your credit card down a bit, make sure you don't miss any payments on bills or other loans, and check your credit record before you apply for loans. If there are mistakes on your record you can challenge them, but you need to do that first!
Does financing a car affect your car insurance?
Getting a car loan shouldn't affect your car insurance quote. Car insurance reflects the risk represented by your choice of car, driving habits, and lifestyle - not your credit record.
However, if you pay insurance monthly, you might see a higher premium. That's because an insurer that lets you pay monthly is basically lending you the money for your insurance. If you have a big car loan and that makes you look less creditworthy, the monthly premium might go up. Paying your insurance annually is always a good idea if you can afford it!
Here's a great tip to give you more consumer protection. Use your credit card to pay for part of your purchase.
Because a car loan isn't connected with the particular car you bought, you don't get Section 75 cover - the rules which make a finance provider responsible if you have a problem with the dealer. (For instance, if you buy an air ticket with your credit card and the airline goes bust, you're covered.)
But if you buy a car from a dealer, and pay part of the price with your credit card, you will be covered - and that's really useful if you have problems with the car.