How to use a personal loan to buy a new car
If you want a new car but don’t have the cash to buy it outright, a personal loan is one way to pay for it.
There are many ways to buy a car and if you choose to pay for it with a personal loan, you’ll be able to use the money to buy it outright.
The car loan will be unsecured, so it’s not held against any other asset you own, and there are lots of providers, from banks to supermarkets, offering personal loans.
You could also buy a new car outright, if you have the money, or use a car finance deal. There are pros and cons of all of these options and here we look at everything you need to know about buying a new car with a personal loan.
How to use a personal loan to buy a car
A personal loan can be used for a huge range of things, from a new car to home improvements. You can get one through most of the main high street banks, credit unions and a number of online providers.
When you apply for a personal loan and the lender accepts you, it will transfer the money into your bank account quickly - usually the next working day. You can then use the money for almost anything you want, such as to pay for a new car.
You’ll then pay back the personal loan to the lender over a set time frame, which is agreed upon before you commit to the loan. There will also be interest charged on the loan, which is usually fixed, but you’ll be told how much this is before you sign on the dotted line.
» COMPARE: Personal loan rates and deals
How to get a personal loan to buy a car
The personal loan market is competitive so it’s worth taking the time to find a loan that’s right for you and one which you can afford.
When you apply for the loan you’ll need to give information, including your income and outgoings, to show the lender you’ll be able to afford the repayments.
The lender will also tell you about any penalties that may be charged if you miss a payment or if you decide to repay the loan early.
Why would you use a personal loan to buy a car?
There are lots of ways to buy yourself a car and the best for you will depend upon your circumstances. If you don’t have the cash to pay upfront, a personal loan is one option.
The difference with a personal loan compared to a car finance deal is that the lender gives you the entire amount to buy the car (or spend it on something else if you choose to). The repayments are then organised with the lender and the car is yours to own outright - rather than paying a monthly fee to a car finance provider which is often a loan secured against the vehicle.
Personal loans vs car loans
The cheapest way to buy a new car is by using excess savings as there are no additional costs that you get with borrowing money such as product fees and interest payments, however not everyone is in a position to do this.
Instead, you could take out a personal loan or a car finance agreement, which in many ways are very similar. With both, you’re entering into an agreement to pay back a loan over a period of time, and you are told what this timeframe is and how much it’ll cost before you take out the loan.
However, with the main types of car finance - hire purchase and personal contract plan - you’ll usually pay a deposit and then make small monthly payments over a timeframe of up to four years. You’ll then have the option of giving it back, or you can pay a sum of money for it to become yours.
With a personal loan, you buy the car outright, meaning it’s yours from the get go and the repayments you make are to the loan provider. The interest rate you pay depends on your credit score, but personal loans are typically cheaper than car finance deals.
» COMPARE: Car finance
What to do if you can no longer afford your personal loan
If your situation changes and you’re no longer able to repay the personal loan, there are some options available.
You may be able to refinance to a different personal loan - one with cheaper monthly repayments. However, this is likely to cost you more in the long run.
Selling your car is another option, and using the money to pay the loan back early. You are allowed to repay personal loans early but there is often a penalty charge to pay.
What happens to my loan if my car is wrecked?
As you own your car outright, you’re responsible for paying for repairs and maintenance. However, if you’re in an accident, your car insurer should be able to cover the costs of the repair - or potentially pay for a new car if your vehicle is totally written off.
But it is important to remember that whatever happens to the car, as the agreement for your personal loan is directly with the lender, you need to continue paying.
Do I need good credit to get a personal loan for my car?
You’ll only be able to take out a personal loan at the cheapest rates with an excellent credit score.
When you apply for a personal loan, your credit score will be checked by the lender. This is so it can see if you’ll be able to make the repayments as agreed to in your repayment plan. The lender also makes a mark on your credit score, which stays there even if the loan isn’t accepted. Therefore it’s always worth using a free eligibility checker first, which won’t harm your credit score, to give you an idea of the type of loan you may be able to apply for.
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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. Read more