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Published 06 July 2021

Should I Use Car Finance or a Loan to Buy a Car?

There are lots of ways to pay for a new car and they all work slightly differently. It can be confusing trying to decide which is best for you, so here we will look at the difference between buying with car finance or a bank loan.

Paying for a car with a loan means you own the vehicle outright and it can also be a relatively cost-effective option, although the cost will depend on your credit score and the interest rate of the loan.

Car finance works slightly differently as you don’t own the car until you pay off the finance in full. However, you can choose to return the car with some types of car finance, which isn’t possible if you buy a car with a loan.

Read on to learn more about when you might choose car finance or a loan to buy a car, and the pros and cons of each option.

Car finance vs loan

If you buy a car with a personal loan, you can split the cost over a number of monthly instalments at a set rate of interest. Terms can be up to seven years.

The contract is with the lender, usually a bank or online lender, and they are completely separate from wherever you choose to buy your car. You can use the money to buy a new car outright, or use it to pay for a portion of the car’s cost.

The cost of the personal loan will depend on your income and your credit score, with the best rates given to those with excellent credit scores.

Car finance also allows you to spread the cost of a new car over monthly payments (with interest), but the agreement is with a car finance provider rather than an independent lender.

You usually pay a deposit at the start of the contract, followed by monthly payments during the term of the contract, and then, depending on the type of car finance you have, you can either pay a lump sum to keep the car, swap it for a different model, or return it.

Here we outline the main differences between buying a vehicle with a loan and with car finance.

Personal loanCar finance
You are responsible for the car and free to modify and drive it as much as you want.PCP car finance deals have limits on the number of miles you can drive, as well as other conditions.

» MORE: How do bank loans work?

Pros and cons of car finance

Car finance can be a useful way to help someone pay for their car, but it may not be suitable for everyone.

Pros of car finance

Cons of car finance

Pros and cons of a personal loan

A personal loan can be a cheaper overall option for buying a car, but this will depend on your credit score.

Pros of a personal loan

Cons of a personal loan

Is car finance or a loan cheaper?

The cheapest option between a car finance contract and a personal loan depends on multiple factors including your credit score, your income, and the type of car you want.

If you have a good credit score and can access the best rates, a loan is likely to be a cheaper option than car finance.

However, buying with cash will likely be the cheapest way to buy a car because you don’t pay any interest.

To work out whether car finance or a loan is better value for money, you’ll need to add together all of the costs involved. This includes any deposit you’re required to pay, the interest on the contract, and any fees that may apply.

You can compare quotes to see what rates and deals you are eligible for, and use this information to help you find the cheapest available option.

But you shouldn’t just think about cost. You will also need to consider other factors such as how important it is for you to legally own the car, and also whether you will want to change cars in a few years.

» MORE: Work out monthly loan repayments

Where can you get car finance or a personal loan?

There are lots of providers of both car finance deals and personal loans. Generally a personal loan can be applied for from a bank or online lender while a car finance deal is arranged through a dealership or a finance provider.

Whatever option you go for, it’s always worth shopping around to make sure you’re choosing the best priced plan for you and that you can comfortably afford it. It’s also worth seeing if you can improve your credit score to gain access to even more competitive rates.

You can learn how to compare car finance here.

Alternatively, if you prefer to own your car outright from the start, you can look at and compare personal loans to see what rates are available. Make sure you are aware of the differences between an unsecured loan and a secured loan.

Image source: Getty Images

About the Author

Rebecca Goodman

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent.

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