Car Finance vs Car Loan

07 Sep 2021

Car Finance vs Car Loan

07 Sep 2021

You’ve found your dream car; or you’re at least wanting to start looking, but unless you have savings or someone generous enough to buy it for you, you will be wondering how you are going to pay for your car. 

There are multiple options available for you to choose from. The most popular options include Hire purchase (HP), Personal contract purchase (PCP) and a personal Loan. 

How do different types of car finance work?

Hire Purchase (HP)

With a Hire purchase deal, you will pay an upfront deposit and then continue to pay off the rest of the car in fixed monthly instalments including interest. 

This type of loan is secured against your car, so you don’t actually own the car until it is paid off in full. The dealership that you have the agreement with owns your car until you have fully paid it off. 

Pros of Hire Purchase
Cons of Hire Purchase
No Mileage restrictions
You can be repossessed If you fail to make payment
No Balloon payment at end of agreement
Missed payments can negatively affect your credit score
You own the car fully after you’ve completed all your monthly payments
You do not legally own your car until after your final payment
Your payments are fixed and so they remain the same throughout your agreement

Can be expensive if you’re only looking for a short-term agreement

Monthly payments tend to be smaller

Personal Contract Purchase (PCP)
If you opt for a personal contract purchase, you will pay fixed monthly payments over a set period of time, with the option to pay a deposit at the start – making your monthly repayments smaller. 

At the end of your agreement, you can give the car back to the dealership and if there is any equity, use that for a deposit towards a new car, pay what is called the “balloon payment” – (however much is left on the car), or take out a new PCP agreement. 

Pros of a PCP
Cons of a PCP
Low Interest 
You have to pay a large final payment at the end of your agreement if you want to keep the car
You can get cars that you otherwise might not be able to afford 
You have to stick to mileage restrictions, or you will face charges 
You don’t have to consider the car depreciating by the end of your agreement 
You have to stick to wear and tear restrictions or you will be charged
Smaller monthly payments 

Personal Loan
A personal loan is an unsecured loan that you get from a bank or lender. With a personal loan, you pay for the car in full upfront meaning that you have full ownership of the car from the start. You pay the loan back to the lender in monthly instalments rather than a dealership. 

Pros of a personal loan
Cons of a personal loan
The dealership cannot repossess your car if you fail to make your payments as you own the car
It’s harder to get accepted if you have a bad credit history
You can choose to buy a car from a dealership or a private seller
The best interest rates are reserved for people with good credit 
You can use a portion of the loan to pay for all or some of the car and use the rest for something else e.g. insurance
You can’t usually get a personal loan for more than £25,000
You can negotiate the price of the car 

You can sell your car before the end of your loan agreement as long as you continue your payments 

Hopefully this blog has outlined the options that are available to you and will help you in making the decision on what's right for you. 

Click here to see if you're eligible for a car loan today!

Editorial Disclaimer: This article was updated 18.10.2021

Opinions expressed here are the author's alone, and not those of any bank, credit card issuer or any other company. This article has not been reviewed, approved or otherwise endorsed by any of these organisations. NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product / service is right for your individual circumstances.