Cheap Personal Car Loans
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Updated May 2017
A personal loan is one of the cheapest ways to buy a car, especially as rates have plummeted in the last few years. But is it the right way to buy a car for you?
This guide looks at the basics of buying a car with a personal loan, including how these loans work and the pros and cons of using one to buy a car. We also reveal the cheapest loan providers.
This is the first incarnation of this guide. Please suggest any changes or ask questions in the cheap car loans discussion.
In this guide.
Not the car finance option you were looking for? Check these out.
What is a personal loan?
If you’re buying a new or used car, you need to borrow, and you want to own the car at the end of the deal, there are two main types of finance you can get.
You can get a hire purchase deal (there’s tonnes of info in the Hire Purchase guide to help you pick the right one) or you can get a personal loan. Indeed the latter tends to be very popular, with many people turning up to dealerships having already arranged finance through their banks – or other high street lenders offering decent interest rates.
An unsecured personal loan is a sum of money you’re lent by a bank or other lender, which you pay back over an agreed period. But lenders don’t offer this money out of the goodness of their hearts. You’ll have to pay interest, as well as paying back the amount you borrowed. Obviously, you want the lowest loan rate possible – so you pay back as little as possible.
A personal loan is unsecured – here’s what that means.
Loans are similar to most other types of car finance in that you pay back an agreed amount each month over the term of the deal.
However, it differs from most other types of car finance in that the loan is unsecured. That is, the car doesn’t act as security for the loan. So, if you can’t pay it back, there’s no automatic right for the lender to take your car off you, which would be the case if you took dealer finance (though they might still seek a court order to do this if you can’t pay what you owe).
What all this means is that you own the car outright as soon as you pay your money and drive off, unlike with finance from the dealer. Sounds good, doesn’t it?
Well, there’s one big disadvantage – because there’s no security, it’s harder to get a personal loan than it is to get other types of car finance. To get one you’ll need a very good credit record and a decent salary.
But, whether you get a personal loan or an HP deal (or any other form of finance), compare the APR – the interest rate you’re offered – to give you the overall cost of the debt. Provided all the deals you’re comparing are over the same number of months or years, the one with the lowest APR is the best deal.
In general though, personal loans are one of the cheapest ways to pay for a car purchase if you don’t have savings.
How does it work when buying a car?
Once you’ve found a car you want to buy, you’ll know the amount you want to borrow. This is based on the price of the car minus any deposit you have in savings.
With a car loan, you borrow a fixed sum, then repay it in fixed monthly payments, usually over a period of one to five years. Rates vary depending on how much you’re borrowing. Borrow a small amount – for example Ј1,500 – and you could pay as much as 8% to 15% interest. If you’re borrowing more – for example Ј15,000 – you could pay as little as 3.4%.
But, before you go ahead thinking that sounds very cheap, there’s a sting in the tail. These rates are what are known as ‘representative’ APRs. This means only 51% of people accepted for that loan need get that rate. The other 49% can, and often do, get given a higher rate.
And, while we have an eligibility calculator to tell you which loans you’re likely to be accepted for, it can’t tell you if you’ll get the headline loan rate (yet).
Say you’re buying a car priced at Ј14,000:
- You stump up a 10% deposit from your savings of Ј1,400, leaving Ј12,600 left to pay.
- You’re accepted for a car loan, and borrow Ј12,600 over three years.
- You get a decent 3.5% APR deal, meaning payments would be Ј369 a month (so Ј13,284 for the three years).
- You drive away from the dealership in your new car, and start to make your monthly loan repayments.
- So in total you’d pay Ј14,684.
With loan rates so low, in the above example you’d pay just Ј684 in interest over the life of the loan.
Try to pay some of it with a credit card – it’ll give you protection
If you can, try to pay at least some of the deposit on a credit card. This will give you powerful Section 75 protection, meaning it should be a lot easier to sort out any issues with the car further down the line. This is because the credit card provider is jointly liable with the car dealer should anything go wrong.
What happens at the end of the loan?
Once all the repayments have been made, that’s it. The lender marks the loan as settled on your credit file, and you have nothing left to pay.
Is a personal car loan the right option for me?
There are so many different options when it comes to buying a car, it can be difficult to choose. Here are the main benefits and pitfalls of choosing a personal car loan:
- It’s simple to arrange and understand.
- It’s flexible – with terms from 1-5yrs (the longer the term, the more interest you’ll pay).
- You can use our eligibility calculator before you apply to find out which loans you’re likely be accepted for.
- You’ll own the car as soon as you’ve transferred the cash to the dealer. This means you’re able to modify it exactly how you want.
- As you’re a cash buyer, you may be able to haggle the price down during the sale.
- Unless you can get 0% finance from the dealer, personal loan rates tend to be cheaper than dealer finance.
- Unless you’ve an excellent or good credit score, you’re unlikely to get any loan.
- Monthly payments are higher than for some other forms of car finance.
- You won’t get a manufacturer’s contribution as you won’t be taking their finance.
- As you own the car outright, you’re responsible for all repairs.
- The car’s value will depreciate, so it’ll be worth a lot less than you paid when you sell it.
Where can I get a loan?
If you’re looking for a loan, check out the best buy rates below.
Remember, the advertised rate isn’t necessarily the one you’ll be offered. Up to 49% of people accepted for the loan could be given a different – usually higher – interest rate.
The rate you’re offered will depend on your credit score, with the best rates available only to those with a squeaky clean history. See our Credit Scores guides for tips on how to boost yours.
We list loans by ‘bands’ as the rate you could get differs depending on how much you want to borrow. Plus, if you want to check if you’ll get the loan before applying, use our eligibility calculator to see your chances. It tells you your likelihood of being accepted by each lender for a loan, though sadly it can’t (yet) tell you whether you’ll get the advertised rate.