Personal Loan

How does Personal Loan work?

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 £1,500 – and you could pay as much as 8% to 13% interest. If you're borrowing more – for example £15,000 – you could pay as little as 2.8%.

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 always tell you if you'll get the headline loan rate (yet).

Let’s take an example…

Say you're buying a car priced at £14,000:

• You stump up a 10% deposit from your savings of £1,400, leaving £12,600 left to pay.

• You're accepted for a car loan, and borrow £12,600 over three years.

• You get a decent 3.5% APR deal, meaning payments would be £369 a month (so £13,284 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 £14,684.

With a low loan rate, in the above example you'd pay £684 in interest over the life of the loan.

Pay some of the deposit with a credit card - it'll give you protection

If you have a credit card, pay even a penny of the deposit on it and you'll get powerful Section 75 protection (provided the car costs between £100 and £30,000, though most would). The credit card provider is then jointly liable with the car dealer should anything go wrong, so means it should be a lot easier to sort out any issues with the car further down the line.

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 Personal Loan right for me?

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 it’s 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.

Personal Loan Q&A

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:

Pros

• It's simple to arrange and understand.
• It's flexible – with terms from 1-7yrs (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.

Cons

• 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.

Who offers Personal Loan?

Banks and Building Societies are providers of personal loans.

Outright Purchase

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How does Outright Purchase work?

Quite simply, by paying the full amount up front, in cash or by electronic transfer.

Is Outright Purchase right for me?

Don’t forget about depreciation. If you have to have the latest model, bear in mind that new car will lose significant value the moment it is driven. There is value in searching for a low mileage used car that has already lost a significant amount of its upfront value. 

If you expect to own and use the vehicle for an extended period of time e.g. 8+ years, with no expectation to sell, or exchange, then outright purchase may be right for you.

However, whilst likely to be the most cost-effective way to own a vehicle, it could leave you financially exposed.

That's according to the National Association of Commercial Finance Brokers, which has said buyers are throwing away half of their consumer rights protection by paying for their new and used cars in cash.