Personal Loans To Buy A Car

Personal loans to buy a car

To many, buying a car is a fun prospect as we all aim to purchase the vehicle of our dreams. It is also a time that many of us will take out a loan to help finance our purchase. Most car owners may not have sufficient savings to buy a car outright and need to know what personal loan options are available to do so. Plus, they can be a highly affordable way to purchase a car with the right loan if the interest rate charged is low enough.

Buying a car is one of the biggest purchases most of us will make, after our homes. When buying one with outside finance, you need to consider a number of things to determine what type of loan is suitable for you. Here, in our guide to personal loans to finance a car, we look at what personal contract plans are possible and specialist car finance so that you can decide what your best option is.

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What do I need to consider when buying a car?

Before settling on any car and, therefore, any financing plan as a consequence, decide what you need the car for as it will impact what type of car you actually purchase. It may mean that you buy a less expensive car when you truly consider what you need it for.

Then, think about how long you need it. Doing so can help determine whether a PCP vs a personal loan may be better for you. Returning it through a PCP option may be an attractive prospect to you, or you may just like the idea of owning your car outright from the start with a loan.

Finally, depending on what car you choose, it may have a big bearing on what finance options you actually have, especially when balanced against your credit rating and what you can afford in terms of repayments. Those with a better credit rating will often access funding with lower interest rates, but that is not always the case, especially if the car itself is used as collateral in purchase plan or hire plan agreements.

Can you get a personal loan to buy a car?

It is possible to take out a personal loan to buy a car, and there are several options available in the personal loan sector that can provide a good option for purchasing a car. The most common personal loan will be an unsecured loan, where you borrow money from a lender to pay back over a set amount of time for a set interest rate. In practice, this means you repay the same amount each month.

What you then use that personal loan for is up to you – though some lenders may ask what the loan is for before extending you the credit. Some may deem buying a car as necessary, particularly if you need it for your job, whereas some may not.

Your questions, answered

Many individuals like buying a car with an unsecured loan because they purchase the car outright with the funds they borrowed. The lender does not have a right to the car. Instead, the loan agreement will have outlined the terms and conditions of the loan and how you will pay it back. Additionally, you will not be restricted on how much you can drive the car either.

The benefit to buying a car in this way, as opposed to buying it with car finance, is that you can shop around for the lowest interest rate you can find available to you, depending on your circumstances. So, in addition to owning the car outright, you may find this a cheaper option than car finance, particularly given that interest rates on loans are historically low at the moment.

The disadvantage of using a loan to buy a car is that the lender will not use the car as collateral. So, if you find yourself overextended, you cannot just give the car back over to settle the debt. Instead, you have to repay the cash. Depending on your circumstances, that may mean that this type of funding is not right for you.

Car finance is an option that many individuals take when buying a car, and car showrooms widely offer it as it helps make buying a car easier for people without the cash in the bank. Given how expensive cars are, that is the case for the majority of the population.

Car finance does come with interest charges like a personal loan does, so they are very similar to one another in some ways. However, they do differ in other important aspects. There are a couple of options available within car finance that may determine whether it is right for you or not. For example:

Personal Contract Purchase

A personal contract purchase, otherwise known as a PCP, is very much like taking out a loan to buy a car. However, it varies from an unsecured personal loan in that you don’t always have to pay off the full value of the car unless you choose to pay one final large payment to secure it. It means that you won’t always own it at the end of the contract – but that actually works out in some people’s favour depending on their circumstances. Many people see a personal contract purchase like a long-term rental.

They are a good option for some people as they can come with lower monthly payments over the term of the contract making them more affordable to some. Additionally, only a low deposit is required and many contracts coming with other flexible repayment terms. Customers can often choose how long their contract is for – the longer it is, the lower the repayment amounts. Then, a customer can choose what they do with the car at the end of the contract. As stated above, it can be returned, or the equity you have built up with a dealer can be used to secure another PCP on another car.

The disadvantages of a PCP are that they often come with a restrictive mileage amount, so if you will be driving a lot, it may not be a good option as you’ll incur more charges going over your allowance. Plus, if you damage the car somehow, you are liable for the fees it costs to put them right. Finally, the balloon payment at the end can often mean you end up spending more on the PCP than you may do with a personal loan. However, this will depend on the loan amount, the repayment schedule and the interest rate charged.

Hire Purchase

Hire purchase works by paying a small deposit, and you pay monthly instalments to drive it. It is called a hire purchase as those instalments pay for you to hire the car until your contract expires. The outstanding amount that you have not paid is secured against the value of the car. At the end of the contract, you should own the car.

Given the low deposit at the beginning of the contract, this can be a cost-effective way of purchasing a car if you can secure a low enough interest rate. Plus, you can often choose the terms of the contract, like the length of the contract and therefore the number of instalments you pay. Plus, unlike the Personal Contract Purchase, you do not need a large sum of money to pay off the loan at the end of the contract. And, hire purchases are not subject to mileage restrictions, so if you need to drive your car a lot and far, this can be a fantastic option for you. Finally, as the car is used as collateral, this option may still be available to you if you have a low credit score, whereas an unsecured loan may not be.

The downsides are that you do not own the car outright until you have made the final payment, so you are always at risk of losing the car should you miss too many payments. Additionally, you cannot sell the car yourself or make any modifications to it in that time. Finally, and perhaps most importantly, the payments you make in a hire purchase plan are often seen to be larger than with a personal contract purchase – to offset the low deposit amount at the beginning of the contract. However, the larger the deposit you can put down, the lower your payments amount.

We have a wide range of lenders that should be able to help you purchase either the car of your dreams or simply the car that will get you from A to B. With a flexible approach to loan applications, they consider each customer carefully to ensure that any loan they have remains affordable so they can pay off their debt and become debt-free.