Buying a car with a personal loan

If you need finance to buy your car, a personal loan or bank loan from a bank or building society can be one of the cheapest ways of borrowing the money if you can get a good rate. But remember to look into the pros and cons of personal loans first. Read on to get the facts you need.

Important points to consider

Important

Securing a loan against your home risks the roof over your head if you don’t keep up the repayments. You may get a better rate if you do but is this worth the risk?

A personal loan and a bank loan are different names for the same thing.

You can use these loans for a used car or a new car – you’re not limited in your choice.

Shop around for the best interest rate by comparing annual percentage rates (APR). The APR includes interest and all of the lender’s other charges. This can be done before you go to your dealer so you’re armed with how much you can borrow at what rate.

Applying for a personal loan may affect your credit rating as the company lending you money wants to check if it can trust you to pay it back. Be careful about this if, for example, you’re also planning to take out a mortgage. You can limit the impact on your credit rating by using an eligibility calculator that does a soft search. Soft searches don’t have any impact on your credit rating. Search online for other comparison sites that offer soft searches.

You can check your credit score for free from the credit score companies, MSE Credit Club, Credit Karma, and, ClearScore. Some also offer to match you to loans with a soft search.

Check the monthly repayment amount and the total amount you’ll end up paying the lender. This can help you find the most affordable option and the one that will cost you the least overall.

Make sure its affordable. If you’re not sure whether you could meet the monthly payments on top of your household expenses, work out what you can afford.

Always check whether the interest on your loan is fixed or variable. If it’s fixed, the interest rate will stay the same until the loan is paid off.

A variable interest rate can go up or down. Be very careful with loans like this – if you can only just make the initial repayments you could get into money trouble if interest rates go up, so think carefully before taking them out.

If you own your own home, you might be tempted to consider a secured loan.

However, this is a much riskier option as the money you borrow is secured against your home.

This means that if you can’t repay the loan, the lender could force you to sell your home to pay off what you owe.

Pros of personal loans

  • It’s one of the simpler ways to finance your car.
  • Can be arranged over the phone, internet or face-to-face.
  • Can be for the whole cost of the car, or for a part of it.
  • If you have a good credit rating you should get access to the best rates available. If you can get access to the best rates a personal loan could be cheaper than dealer finance. However, if there’s a 0% finance on offer it’s possible that may work out cheaper.
  • Interest rates are normally fixed – although they can be variable, so always check.
  • You choose the loan period (typically one to seven years), but remember – the longer the term the more you are likely to pay in interest overall.
  • Unlike with some other forms of car finance, you own the car while paying off the loan so if you got into financial difficulties you could sell it.

Cons of personal loans

Top tips

If you’re planning to borrow just under £3,000, it might be worth borrowing a little extra in order to get a cheaper rate.

This is also true if you want to borrow just under £5,000.

For instance, the APR for loans of £3,000-£4,999 could be 12%, yet as little as 3% for loans of £5,000-£7,499.

  • Monthly payments can be higher than other forms of finance, but this depends on the term, and costs.
  • You might need to wait for the money to come through, although some lenders make funds available almost immediately.
  • Many people can’t get advertised rates. The rates advertised are often what is known as ‘representative’ or ‘typical’ APR’s. This means only 51% need to be eligible. Having a good credit score will help but does not guarantee you can get it.
  • As you own the car you will be responsible for all repairs.
  • You might end up borrowing more than you planned. That’s because most banks won’t lend less than £1,000 or for less than 12 months, or because interest rates might reduce the more you borrow offering a temptation to increase the size of the loan.

How a bank/personal loan for a car works

You can use a bank loan to purchase a car privately as well as from a dealership. That’s because once the loan money is in your account, you can treat it like cash.

If you’re thinking of getting a loan, use our Loan calculator to work out how long it would take to pay it off and how much you’d need to repay each month.

You can also compare different rates and lengths of loan.

If you’re comparing loans online, make sure you check them on a few different comparison sites. Here are some suggestions:

You may be offered payment protection insurance (PPI). Think carefully about whether you need this, and take a look at our Do you need payment protection insurance? to help you decide.

Once you’ve agreed with your bank, the loan will be in your account within a few days. You can then go to your car dealership to purchase your car.

Personal loans are repaid monthly. A payment schedule will be set up with your bank, so you’ll know exactly how much you’ll be repaying.

Loan protection

If you can pay some of the cost on a credit card you can benefit from section 75 protection. This can help you to resolve issues if you have them later as the credit card company will be jointly liable with the car dealer should anything go wrong.

Cooling off period and cancelling

Personal loans come with a cooling-off period from either the date you sign the loan agreement or from when you receive a copy of it – whichever is later.

A cooling-off period means you have 14 days to decide whether the loan is right for you, and if not, you can cancel it. It lets you withdraw from loans up to £60,260.

If you do cancel inside the cooling-off period, you’ll still owe the capital and interest that has built up over that time. You’ll need to repay this within 30 days.

Even if you cancel the loan, this doesn’t cancel your agreement to buy the car from the car dealership, so you’ll still need to find a way to pay for it.

Settling or paying off the loan early

You’ll need to write to your lender and ask for a settlement amount – the amount you need to repay to cover the loan in full.

Once they confirm this you’ll then have 28 days to pay off that amount. You should also get a rebate of any future interest and charges you have paid.

You can also ask for a partial loan settlement. This will make your loan smaller, and so will affect how you pay for the rest of your loan. The rebate you receive for any interest and charges will be less than if you pay off the whole loan.

When you contact your lender, they need to be clear about how you’ll repay the rest of your loan. You can negotiate, which might mean you pay the rest of the loan off in a shorter time, or pay smaller amounts each month.

Getting the best personal loan deal

  • Don’t just accept the first rate you are offered by your bank or building society.
  • Shop around to see which providers are offering the cheapest interest rates. Compare APRs, but keep in mind that a poor credit history could affect how much you can get. A comparison website can help you do this.
  • Get a quote from the lender before you apply. If they need to a credit reference search, make sure it’s a ‘quotation search’ which doesn’t leave a mark on your credit file.
Use our Loan calculator to find out how much your loan could cost.

What happens if you can’t afford to pay

You may be able to better control your personal loan, and you can find out more on How to reduce the cost of your personal loans.

If you’re struggling to meet household bills as well as your car payments, you can get free, confidential advice from a debt advice organisation or charity.

You could also:

Sell the car

Because you own the car, you can sell it and use the money to pay off as much of the loan as possible. This will significantly lower the amount you’d have to pay per month – and the number of months you’d need to keep paying - to pay the full loan back.

Talk to the finance company

They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.

Early repayment

You could also think about getting a settlement figure from your lender, which would be one final larger payment to end the agreement. You could be better off because you may be able to negotiate a price you can cope with. You can then keep the car or sell it.

If you’re having more serious money problems, get free debt advice.

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