Personal car loans

Cheap personal car loans
Borrow at 5.9% for £7.5k+

Personal car loans offer a cost-effective means of purchasing a vehicle, despite experiencing a doubling in interest rates over the last 18 months. Armed with the right knowledge, you can swiftly navigate to our Loans Eligibility Calculator, pinpointing the lenders with the highest probability of approval. Alternatively, delve into our comprehensive guide for deeper insights into the mechanics of personal car loans, comparisons with other car finance options, and top recommendations for loans.

What is a personal loan?

Personal loans, also referred to as unsecured loans, entail borrowing a specific amount of money from a lender, with an agreement to reimburse it within a predetermined period, through fixed monthly installments.

In scenarios where you’re in need of purchasing either a new or pre-owned vehicle and find it imperative to secure funds (such as when your current vehicle is beyond repair and necessitates immediate replacement, yet your savings fall short and waiting is not feasible), a personal loan can serve as a cost-effective solution, especially given the prevailing rates, which are currently hovering near historic lows.

Once you’ve identified the vehicle you intend to purchase, you’ll ascertain the sum you require for borrowing. Ideally, this figure should be determined by deducting any savings you possess, thereby reducing the loan amount to the minimum necessary.

The lender will levy interest as its charge for lending you money, thus requiring you to reimburse the borrowed amount along with interest. This arrangement offers the benefit of immediate cash availability while enabling you to stagger the expense of a purchase over a specified period, typically spanning one to five years.

The fixed interest rate you secure hinges on several factors, including the desired loan amount and your creditworthiness. It’s important to note that the rates provided are ‘representative examples’, indicating that only 51% of successful applicants may receive the advertised rate. Therefore, there’s a possibility of being offered a higher rate upon application.

We’ve compiled a list featuring the most economical rates, and our eligibility calculator goes a step further by not only indicating which loans you’re most likely to qualify for but also revealing whether you qualify for the advertised rate through a personalized comparison table.

Upon approval for a personal loan to finance a vehicle purchase, the funds are typically deposited into your designated bank account. From there, you can seamlessly transfer the money to the dealer to complete the payment for your chosen vehicle. This process allows you to drive away as the proud owner of your new car on the same day.

Pay just a penny with a credit card to get greater protection

If the vendor agrees to payment via credit card, making even a small contribution towards the car using this method activates robust Section 75 protection (applicable when the car’s price falls within the range of £100 to £30,000). In this scenario, the credit card company shares liability with the car seller in case of any mishaps, thereby facilitating a smoother resolution process for potential car-related problems in the future.

What happens at the end of the loan?

Once all your payments are complete, the lender considers the loan fully repaid, reflecting this status on your credit record, leaving you with no remaining obligations.

Alternative types of car finance to consider

This guide centers on personal loans, yet prior to proceeding, it’s prudent to explore alternative avenues of car finance to determine if they align more closely with your needs.

In general, there exist six distinct methods for financing a car. The overview below highlights the primary variances, after which we’ll delve deeper into alternative options beyond loans.

Comparing ways to finance a car purchase

Regrettably, there’s no universal solution when it comes to determining the optimal method of financing a vehicle. A multitude of factors, including your desire for ownership and various other considerations, heavily influence the decision. Nonetheless, we’ve delved deeper into each alternative to a personal loan, offering additional insights to assist you in determining the most suitable option for your needs.

• Cash savings – the cheapest option for most cars

It stands out as the ultimate victor if your aim is to have full ownership of the car right from the start, as it eliminates any interest payments or debt obligations. However, if your intention is to acquire a brand-new vehicle – which typically depreciates by approximately 40% within the initial year – and you anticipate replacing it within a few years, exploring leasing or a Personal Contract Purchase agreement is advisable. These alternatives may result in a lower overall cost of ownership.

• 0% spending credit card – no interest if you can get a big enough credit limit (and the dealer accepts cards)

Depending on the value of your prospective automobile, utilizing a 0% spending credit card might emerge as the most economical method of borrowing. This avenue grants you full ownership of the vehicle (akin to a cash transaction), coupled with the added safeguard of Section 75 protection. Nevertheless, it’s imperative to ascertain whether the car dealership facilitates credit card payments, as this isn’t universally accepted.

Regrettably, prospective applicants are usually in the dark about the credit limit they’ll secure prior to submission. It’s advisable to strategize for settling the debt well in advance of the expiration of the 0% promotional period, as the interest rate escalates significantly thereafter. The most extended promotional periods typically span up to 23 months at 0%—refer to our comprehensive 0% spending cards guide for further insights.

• Hire Purchase (HP) could be a viable choice if securing a more affordable loan proves challenging, as it entails the lender retaining ownership of the vehicle until you’ve fulfilled all repayment obligations

Similar to a loan, this process involves borrowing the full cost of the car and repaying it over time. However, ownership of the car remains with the finance company until the final payment is made. The finance company holds the car as collateral, similar to a mortgage, enabling them to repossess it if payments are not met.

The presence of collateral often makes securing an HP deal easier compared to standard loans, although a deposit, typically around 10% of the car’s price, is usually required. Therefore, determining how to finance the deposit is crucial.

Similar to PCP arrangements, dealers profit from HP finance deals, potentially leading to larger discounts or contributions towards the deposit for new cars. When purchasing a used car, this could open up opportunities for negotiation. It’s essential to meticulously calculate the total repayment amount, factoring in all interest, to ascertain the genuine value of any discounts offered. Explore our guide on Affordable Hire Purchase for further insights.

• Personal Contract Purchase (PCP) – can be good if you want a new car every few years, but often more expensive overall than a loan

This method is quite popular for acquiring a fresh vehicle, particularly if you’re someone who enjoys switching cars often and prefers to handle payments on a monthly basis. Essentially, it functions like a loan, albeit with monthly payments that tend to be more economical since you’re not covering the entire car value. Ownership isn’t automatic at the term’s end unless you opt for it.

The process involves an initial deposit followed by monthly payments over a predetermined period. Typically, there’s a mileage limit, but as long as you adhere to it and maintain the car well, you have the choice to either return it and conclude the agreement or make a ‘balloon payment’ to secure ownership.

Since dealers profit from the financing arrangement, they might extend more substantial discounts or contribute to the deposit for new cars. In the case of used cars, this could facilitate more negotiation room regarding the selling price. However, it’s crucial to exercise caution and meticulously calculate the total repayment amount inclusive of all interest charges. This calculation reveals the genuine worth of any discount. For further insights, refer to our comprehensive guide on economical Personal Contract Purchase options.

• Car leasing/Personal Contract Hire (PCH) – low monthly rental payments, but you’ll never own the car (nor have the option to)

Unlock the gateway to driving a sparkling new car with a monthly installment plan. However, it’s akin to embarking on a prolonged lease journey; the car will never truly be yours, and purchasing it won’t be an option. Instead, you initiate the process with an upfront payment, followed by regular monthly installments throughout the contract’s duration, typically spanning from one to four years.

Similar to PCP arrangements, you must specify a mileage limit, such as 8,000 miles annually, and shoulder the responsibility of maintaining the vehicle. Upon contract conclusion, you simply hand back the keys (although surpassing the mileage limit or any damages may incur additional charges). For comprehensive assistance, delve into our guide on Budget-Friendly Car Leasing.

Where can I get a loan?

In your quest for an auto loan, peruse the prime rates highlighted below. However, keep in mind that the showcased rate might not align with the one extended to you. It’s worth noting that nearly half, about 49%, of applicants may encounter an alternative – typically elevated – interest rate. Your individual rate will hinge on your credit rating, with the most favorable rates typically reserved for those with stellar scores.

We categorize loans into ‘bands’ since the interest rate you secure varies based on the loan amount you seek.

Lowest-cost loans below £3,000

As emphasized earlier, it’s prudent to borrow only what you truly require. However, an interesting anomaly arises where acquiring a slightly larger loan could lead to lower costs. Interest rates on loans below £3,000 tend to be higher, hence it’s advisable to ascertain whether borrowing a bit more might actually result in lower expenses.

Crucial. For loans of up to £5,000, opting for a money transfer credit card might be considerably more advantageous, particularly if you can settle the entire balance within 9-12 months.

Important: While some financial institutions extend personal loans of up to £50,000, it’s a significant obligation. Thus, exercise utmost caution before committing to such a substantial sum. Ensure absolute certainty regarding your capability to repay the loan.

Prior to proceeding with borrowing, it’s advisable to consult your current bank. Favorable interest rates for large loans are frequently reserved for established clientele. Should your bank prove unhelpful, explore competitive rates available in the broader market.

If the mentioned solution proves ineffective, an alternative approach could involve consolidating smaller personal loans or opting for a remortgage. However, this typically entails prolonging the repayment period, incurring higher interest rates, and potentially using your home as collateral.

What are the pros and cons of borrowing money for a car?

Securing a personal loan to finance a vehicle purchase presents a blend of benefits and drawbacks. Prior to committing to debt, it’s imperative to assess your financial standing, objectives, and preferences. Below are several merits and demerits worth considering:

The pros of personal car loans

• You own the car immediately. Securing a personal car loan grants you instant ownership of the vehicle. This means you can pay for the car outright and assume ownership immediately, despite spreading the financial burden over time. Being the rightful owner empowers you to drive and personalize the car according to your preferences, a privilege not always afforded by alternative car financing methods, some of which may impose constraints such as mileage limits.
• Flexibility: Personal car loans offer a range of repayment terms, providing the flexibility to select one that aligns with your financial situation and requirements. Opting for longer terms can decrease monthly payments, albeit potentially resulting in higher interest charges.
• Potentially access a wider range of vehicles, support and options. Financing options open doors to a broader spectrum of vehicles, assistance, and features. This avenue may enable you to explore newer models, possibly boasting enhanced reliability. Additionally, purchasing from a dealer might entitle you to warranties and post-purchase support services. Furthermore, if opting for a brand-new vehicle, customization to match your specifications is feasible, although prudent consideration of depreciation is essential in such cases.
• Boost your credit score. Timely repayment of a car loan can significantly enhance your credit score, showcasing your adeptness in managing credit responsibly. This positive credit behavior augments the likelihood of securing financing for future endeavors.

The cons of personal car loans

• You could pay significant interest. When you borrow money, it inevitably comes with interest, amplifying the overall expense of purchasing the car. Keep in mind that the duration of the loan directly correlates with the amount you’ll pay in interest.
• It’s a BIG commitment. Opting for a personal loan to finance a car purchase signifies a significant financial commitment, entangling a portion of your income for an extended period. Unforeseen life events or financial hardships can pose challenges in meeting monthly payments, necessitating careful budgeting.
• You need a good credit score. A favorable credit score is essential; without one, securing a reasonable interest rate becomes difficult, and you might even face rejection for a personal car loan. Nonetheless, this risk accompanies applications for other forms of financing as well. Refer to our Credit scores guide for comprehensive details on accessing your score for free, along with strategies for enhancing it.
• The possibility of repossession. Failure to fulfill payments could lead to the lender reclaiming the car. This not only induces stress but also carries severe repercussions for your credit rating and financial well-being.

Before acquiring a personal loan for the purpose of purchasing an automobile, thoroughly evaluate your financial standing, explore alternative options, and analyze the enduring effects on your financial plan and aspirations. It is essential to scrutinize loan conditions and interest rates meticulously and to grasp the full extent of the terms and conditions associated with potential loan contracts.

Can I be rejected for a personal car loan?

Yes, getting turned down for a personal car loan is a possibility. This is because a personal car loan essentially mirrors a standard unsecured personal loan, meaning identical rules and procedures come into play.

Your creditworthiness will undergo scrutiny, and if the lender determines you’re not creditworthy – meaning they believe there’s a heightened risk of you defaulting on payments – they’ll decline your application.

When assessing your ‘creditworthiness’, a lender primarily considers your credit score and credit history. Factors such as a poor credit rating, a track record of late payments, or substantial existing debt could lead to loan rejection. Similarly, not meeting the income requirements or having an unstable employment history might also result in refusal.

Apart from poor credit, other reasons for being denied a personal car loan may include submitting incomplete or incorrect details on your loan application, attempting to borrow an excessive amount, or failing to meet the lender’s specific eligibility criteria.

Personal loan vs car finance: Which should I choose?

Determining whether a personal auto loan or conventional car financing suits your needs hinges on several factors, encompassing your individual preferences, financial standing, and future aspirations. Here’s a Below of each alternative:

Personal car loan

When you opt for a personal car loan, you gain immediate ownership of the vehicle. This grants you the freedom to shop around among different lenders in search of the most favorable interest rates available. Additionally, unlike leasing agreements, there are no mileage restrictions to contend with, affording you the liberty to drive without worrying about incurring extra expenses based on distance traveled.

However, it’s worth noting that monthly payments under a car loan arrangement may tend to be on the higher side compared to certain leasing alternatives. Furthermore, as the sole owner of the vehicle from the outset, you also assume full responsibility for its depreciation over time.

Car finance

Traditional methods of car financing include car leasing, Hire Purchase, and Personal Contract Purchase. These options often boast reduced monthly payments compared to individual car loans, along with a lesser upfront deposit. Consequently, you could potentially acquire a more luxurious vehicle than if you were to purchase outright.

Nevertheless, while the initial outlay may seem lower, the total expenses are likely to mount higher. Moreover, the nature of the chosen car finance may result in delayed ownership until the last payment is settled. Furthermore, opting for car finance usually entails constraints on mileage and potential extra fees for surpassing these limitations.

So which is better?

The optimal choice varies based on personal preferences and financial circumstances; there’s no universal solution. If possessing full ownership of the vehicle is paramount and you anticipate a long-term commitment, opting for a personal car loan is probably the most suitable route. Conversely, if you prioritize reduced monthly installments and the flexibility to upgrade to newer models regularly, car financing might align better with your needs.

How do personal car loan repayments work?

So, you’ve got the money from your lender and bought your car: how exactly do the loan repayments work?

• You’ll be making monthly payments. The vast majority of auto loans are settled through monthly payments. The amount you’ll be paying monthly depends on various factors such as the total loan amount, the interest rate, and the duration of the loan. If the loan term is longer, your monthly payments will be lower, but you’ll end up paying more over time due to accruing interest.
• Consider setting up a Direct Debit. Life can get busy, and it’s easy to forget about making car loan payments. However, missing a payment can negatively impact your credit score and may incur additional charges in the form of interest and late fees. The easiest solution is to set up a Direct Debit, ensuring that payments are automatically made to the lender without you having to remember to do it manually.
• Interest payments are inevitable – known as APR. APR, or annual percentage rate, represents the interest charged on the loan along with any associated fees. The interest rate you’ll be charged depends on factors such as the lender, the loan amount, and your creditworthiness. You can find more information about APRs in our Interest Rates Guide and explore examples of competitive rates in the best-buy rates section above.
• Consider switching your loan to potentially save money. It might be possible to reduce your interest payments by transferring your loan to a different lender if you find one offering a better rate. However, keep in mind that there might be an early repayment penalty to consider. Our loan cost calculator can help you determine whether switching lenders is financially beneficial.
• Early loan repayment could be advantageous. If you have the means, paying off your loan ahead of schedule could save you a significant amount in interest payments. Typically, there’s an early repayment fee involved, usually equivalent to one or two months’ worth of APR. Nevertheless, this fee is often less than the interest accrued if you were to continue making regular payments until the end of the loan term.

What other costs should you consider when buying a car?

Certainly, loan reimbursements constitute just a fraction of the expenses incurred in the process of purchasing and maintaining a vehicle. Beyond the regular payments, there exists a plethora of other financial obligations to factor in, ranging from fuel or electric charges to insurance premiums. It’s imperative to meticulously assess all these elements to accurately gauge the comprehensive cost associated with owning a car.

Outlined below are the primary outlays deserving consideration:

• Fuel. Going the distance requires fuel – quite literally. According to insights from NimbleFins, the typical driver allocates £1,225 annually for petrol and £1,572 for diesel. However, actual expenses vary based on driving frequency, speed, and even refueling locations. For those with fully or partially electric cars, factoring in charging costs is essential, although opting for specialized electric vehicle tariffs may offer more economical options.
• Insurance. Legally driving in the UK mandates at least third-party motor insurance, though many opt for comprehensive coverage to safeguard against potential vehicle damage. The average annual car insurance premium stands at £900, prompting the utilization of our Compare+ Car Insurance tool to pinpoint the most budget-friendly policy. Additionally, some seek peace of mind with breakdown cover, available either as a separate expense or bundled within certain bank account packages, which can prove cost-effective.
• MOT and servicing. Every car over two years old must undergo the Ministry of Transport test (MOT), a legal requisite. While MOT fees are capped at £54.85 for cars, lower-priced options are obtainable. Any repair charges incurred are separate from the initial MOT cost. Furthermore, regular servicing, though an added expense, promotes vehicle health and longevity.
• Maintenance. Beyond MOT obligations, routine maintenance is inevitable for most cars. Expenditure throughout the year hinges on the frequency and severity of issues encountered. Certain breakdown cover plans may cover minor repairs. Additionally, consumable parts such as tyres, batteries, and wiper blades necessitate periodic replacement.
• Road tax. To access public roads, payment of road tax, or vehicle tax, is obligatory. Charges are determined by the car’s age, engine size, fuel type, and CO2 emissions, with some exemptions. Registering a new car incurs a different annual rate. Detailed information on road tax is available on Gov.uk.

Additional expenses to consider when purchasing a vehicle encompass parking fees, tolls, and various road levies like congestion charges.

Personal car loans Q&A

Q – What factors can affect my loan amount and repayments?

A – Lenders have varying criteria for determining the amount you can borrow, taking into account factors such as your income and credit history. It’s essential to review your credit report for accuracy before comparing loan options. If there are errors, take steps to rectify them and improve your credit score. Utilize resources like free credit report checks and advice on enhancing your creditworthiness.

Once you’ve assessed your credit standing, utilize our loans eligibility calculator to gauge your likelihood of approval with various lenders. Experiment with different loan amounts and repayment periods to understand how they impact your results.

Extending the repayment term reduces monthly installments but increases total interest payments over the loan’s duration. It’s advisable to repay debts promptly to minimize overall costs. Strive to settle outstanding balances as swiftly as possible.

Q – How can I make repayments as low as possible?

A – To secure the best deal, seek out the loan offering the most competitive interest rate available.

Additionally, you can decrease your monthly installment by opting for a smaller loan amount—this might entail contributing a larger upfront sum from your savings, provided it’s feasible—or by extending the loan duration. This strategy will result in a reduced monthly commitment, although it will entail higher overall interest expenses.

Another tactic for reducing payments involves selecting a more economical vehicle; as the cost of the car decreases, so too will the repayment amounts.

Q – What if I want to pay off my loan early?

A – You have the flexibility to accomplish this task at your convenience. While certain lenders offer the option without penalties, the majority will impose a charge, typically ranging from one to two months’ worth of interest.

To repay a loan ahead of schedule, simply contact your lender and request a ‘settlement figure’. This figure represents the total amount required to fully settle the loan.

Q – What happens if I miss a payment?

A – Failure to make a payment typically prompts the lender to reach out and inquire about the issue. Consistent non-payment will result in a ‘default’ status being assigned to you, impacting your credit report and potentially hindering future credit opportunities.

Should you encounter difficulty in meeting repayment obligations, it’s essential to proactively communicate with the lender, preferably before the next installment is due. By notifying them of your financial challenges, they may offer assistance in the form of an alternative, manageable repayment arrangement.

However, if you fail to notify the lender and persist in missing payments, legal action may ensue. This could range from the lender seeking court intervention to authorize the retrieval of assets, such as your vehicle, equivalent in value to the outstanding debt. In extreme cases, the lender may petition the court to declare you bankrupt due to the debt.

Q – Do I get Section 75 cover with a loan deal? If not, do I have any protection?

A – No. Section 75 does not extend to personal loans since the lender directly disburses funds to you, establishing no direct relationship between the lender and the car dealer. However, utilizing a credit card for any portion of the car’s purchase enables coverage under Section 75, regardless of subsequently securing a loan for the remaining amount.

Should issues arise concerning a vehicle purchased with a personal loan, attempt to address them directly with the dealer. The dealer is bound by the Supply of Goods Act, mandating that the vehicle meets its intended purpose, matches its description, and endures for a reasonable duration.

Regrettably, purchasing a used car from a private seller with a loan offers diminished protection. Refer to the consumer protection regulations outlined in the guide on buying a used car for relevant information.

Q – Will I be credit-checked?

A – Yes. Once you submit your application, the lender will conduct a credit check to assess your reliability in repaying the loan.

Similarly, failing to meet repayment obligations could result in a negative impact on your credit history, potentially hindering your chances of securing a mortgage or obtaining other forms of credit. For further details, refer to our comprehensive guide on Credit Scores.

Q – What if I need to borrow more than they’ll lend?

A – Once you’ve submitted your loan application, it becomes a permanent entry on your credit report. Therefore, if you’ve sought out the most cost-effective loan option available to you, there’s little rationale in turning down the funds simply because they don’t match your desired amount.

Should there be a shortfall in the funds obtained, you might consider applying for another loan from a different source. However, it’s important to recognize that any potential new lender will factor in your existing loan when assessing your eligibility, and they may determine that you’re unable to handle additional borrowing.

Q – What if there’s a problem with the car?

A – Buying a car through a loan and discovering defects necessitates returning it to the dealer for repairs, as per the Consumer Rights Act, which mandates that the vehicle must match its description and serve its intended purpose.

When glaring issues are apparent, refrain from accepting the vehicle upon delivery. Should problems arise later, promptly notify the dealer for resolution or a replacement.

Conversely, buying from a private seller entails fewer protections, necessitating a test drive to assess the vehicle’s condition before finalizing the purchase. For comprehensive guidance, consult our handbook on buying pre-owned cars to identify crucial factors to consider.

Q – What will happen if UK interest rates change?

A – Virtually all personal loans come with a fixed rate, ensuring that the interest rate and monthly repayments remain consistent throughout the loan term. This stability persists regardless of fluctuations in the base rate, the official borrowing rate set by the Bank of England, which influences returns for savers and costs for borrowers. Consequently, whether interest rates climb or descend, there is no effect on the terms of the loan.

Typically, alterations to the base rate do not influence the interest rates offered by lenders to potential borrowers. The primary factor influencing these rates is competition among lenders, rather than external economic factors (provided that all lenders can maintain profitability).

Q – How quickly will I get the money?

A – The timing of receiving the funds hinges on the lending institution. Should you opt for an online application that allows for digital signatures, you might find the cash deposited into your account within mere hours.

However, if you’re awaiting physical documents dispatched by traditional mail, the process could extend to approximately a week before the funds are made available to you.