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What is personal loan car finance? Car finance vs. car loans

Find out how personal car loans compare with PCP, HP, and other car finance methods, and learn how these loans work

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What is a personal loan for a car?

A personal loan is a way some people pay for a car. It’s a type of unsecured loan that you can take out to purchase the vehicle and is often funded by your bank.

Just like other types of car finance, your personal loan will be repaid over a contracted period. This will usually mean regular monthly payments of an agreed amount.

As personal loans will usually be unsecured, this means the car will not be used as collateral in the event you don’t make the payments.

Is car finance the same as a personal loan?

Car finance and personal loans differ as car finance is specifically meant for the purchase of a car. Personal loans can be used for many types of purchases, as the money will be deposited into your chosen bank account.

Using a personal loan to pay for a car does mean that you’ll be the owner of the vehicle from the get-go, whereas you’ll only own a finance car outright once you’re done making the payments.

Because of this, you’ll be able to sell the car you purchased with a personal loan before you’ve finished repaying, but car finance deals must be fully paid off or settled in another way before you can legally sell the vehicle.

How do personal loans work for car finance?

The process for buying a car with a personal loan is straightforward and not much different than buying a car using car finance.

  1. Find your perfect car - we’ve got some brilliant used models to choose from

  2. Apply for a loan – it’s a good idea to compare interest rates and see what’s on offer before choosing your loan provider to ensure you’re getting the best deal

  3. Buy your car – once the money has been deposited into your account, you can purchase your car and get on the road

  4. Monthly repayments – now you’ve got your vehicle, you’ll start making your monthly repayments in line with your loan agreement

Personal loan car finance vs. Personal Contract Purchase

Personal Contract Purchase (PCP) is a type of car finance that lets you spread the cost of your car, but you’ll only be paying the depreciation amount until the end of your contract. At that point, you’ll have to pay a final ‘balloon payment’ to take ownership of the car.

PCP differs from personal loan car finance as you won’t automatically be the owner of your car. You’ll need to get to the end of your contract and then pay that final optional payment before you own the vehicle outright.

Because PCP doesn’t cover a car's full cost, this means the monthly payments might be cheaper than a personal loan.

A personal loan might be better if you’re sure you want to keep your car and will also mean that you can do things like modify the vehicle without the permission of the car finance lender. With PCP finance, the lender will own the car until you have made your final payment or you settle the finance early, and so will have a say over what you can and can’t do while still in the term of your agreement.

Personal loan car finance vs. Hire Purchase

Hire Purchase (HP) is another kind of car finance that allows you to spread the full cost of the vehicle through your monthly repayments.

You’ll need to pay a small ‘option to purchase’ fee that’s included in your final payment, however.

With HP, you won’t be the legal owner of your vehicle until you’ve finished paying the full amount. A personal loan might be the best option if you want to own your car from the start.

Learn more about car finance: