Car finance vs personal loan: which actually saves you money?

Is it better to buy a car with a personal loan or car finance? Explore your options in our jargon-free guide.



Borrowing money for a new or used car is a big decision – up there with getting a mortgage, moving house or building a home extension.

Why? Well, the sums involved are often big and involve committing yourself to repayments in a changing economy – and possibly in changing personal circumstances.

It's no surprise, then, that people want to get it right. In practice, this usually means choosing between:

• A car finance agreement from a dealer or car finance broker
• A personal loan from a bank or online finance provider
  
  

The big question: which of these two types of credit is best for you? As so often in the world of finance, there's no one-size-fits-all answer.

Whether you go for car finance or a personal loan depends on a range of factors, including:

• The kind of car you want
• How important it is that you own the car
• Your financial forecast
• Your credit score
  
  

In this article, we explore car finance and personal loans so you can understand the issues better and make the right decision for you.

So, first of all, what do we mean by "car finance"?

What is car finance?

Car finance involves borrowing money from a car dealership or car finance broker to buy a car. The car can be either new or second-hand.

As with all kinds of loans, interest is added to your repayments. So, if you get loaned £1,000, say, you'll be paying that £1,000 back with extra on top for the lender.

There are three main kinds of car finance agreements:

• Hire purchase (HP)
• Personal contract purchase (PCP)
• Car leasing
  
  

HP involves hiring a car, then buying it once you've paid off the loan. PCP is similar, but at the end of the agreement you can choose between buying the car and handing it back.

Car leasing, meanwhile, involves renting the car for an agreed period and paying back a fixed amount each month. At the end of the agreement, the car gets handed back.



How is a bank loan different from car finance?

A car finance agreement involves borrowing money from a car dealer or car finance broker. A bank loan – also known as a "personal loan" – is borrowed from a bank or online finance provider.

As with car finance, a bank loan is split into monthly repayments with interest added. Unlike car finance, a bank loan isn't specifically for a car. It's a personal loan that can be spent on anything for personal use.

With car finance, you're given the car and you pay it back. With a bank loan, money gets put in your account and you buy a car with it.

The amount of money you can borrow and the level of interest on your repayments depends on two things:

• Your income (current and forecast)
• Your credit score
  
  

Which is right for me?

There are various factors informing your choice between car finance and a personal loan. One of the most important is your credit score.

People's credit scores vary for all sorts of reasons. If you have a strong credit score, a personal loan may be cheaper overall.

However, if you have a low or middling credit score, car finance could be for you. Banks are unlikely to lend you the money but there are specialist car finance brokers like us who will.

Other things to consider include:

• Mileage limits: personal loans are limitless whereas car finance agreements tend to be restricted.
• Vehicle ownership: with a personal loan, you own the vehicle from day one. With a car finance agreement, the car isn't yours until the last repayment has been made.
• Flexibility: PCP car finance deals are flexible and allow you to change car every few years.
  
  

What are the advantages of car finance?

In our view, there are three main advantages of car finance agreements:

1. They're flexible
2. They're convenient
3. They're good for your credit score in more ways than one
   
   

1. Flexibility

A car finance broker or car dealer will offer you a range of car finance options. You're then in a position to choose the best one for your circumstances.

PCP and HP agreements are flexible because they let you hand back the car before the deal is completed. This hinges, however, on you making an agreed-upon number of repayments.

2. Convenience

Personal loans have to be arranged yourself, whereas a car dealer or car finance broker will sort out the finance agreement for you.

3. Credit score

Perhaps most important of all is the question of credit scores.

Your credit score determines how reliable you look to lenders and can affect your ability to borrow in the future.

A car finance agreement can be good for your credit score in two ways. First, making all your repayments on time can improve your credit score, making borrowing easier down the line.

Secondly, you're unlikely to get a personal loan if you have a poor credit score. There are, however, car finance providers like us that specialise in working with people with poor credit.

Which is cheaper?

The overall cost of a personal loan or car finance agreement will depend on a range of factors, from the type of car you want to your current financial situation. This makes it difficult to say which is cheaper without taking a close look at your finances.

Your best bet is to explore the pros and cons of each kind of arrangement, factor in all the costs and then look for the best deal for you.

If, however, you've got poor credit, then car finance is often the best option.

Are you looking for bad credit car finance in Newcastle upon Tyne? Zoomo is an RAC Approved dealership with a 98% finance acceptance rate. It's quick and easy to apply for finance online.