Buying a car with a personal loan

A personal loan is one of the most common ways to purchase a new vehicle. It can be one of the cheapest ways to buy a car and when it is used to buy a car it is typically referred to as a personal car loan.

What is a personal car loan?

A personal loan can be used for a range of needs, in this case it is used to buy a new vehicle.

You borrow a sum of money to purchase a car and then make regular monthly payments, paying back what you owe plus interest. You can take out a personal car loan from most banks and building societies, including specialised lenders like RateSetter.

Personal car loans are usually unsecured, so you can borrow the money without the car being used as collateral.

How does buying a car with a personal loan work?

Buying a car with a personal loan is quite simple. You apply for a loan with your chosen lender (most lenders will let you take a quote first, so you know whether you are eligible for the loan before you apply).

You decide how much you want to borrow and for how long. The interest rate you pay will depend on your credit score, amongst other factors.

Once you’ve been approved, your money is then transferred to your nominated bank account. From here you can go and purchase your new car from either a dealer or private seller.

Once you’ve got your car, you’ll pay back you loan in fixed monthly instalments – probably by Direct Debit. Your lender should tell you your payment schedule as part of your agreement.

Pros of a car loan

• Usually simple to arrange – most personal loan applications can be completed over the internet.
• The repayment plan is usually less complex and the interest rates are normally fixed.
• A personal loan isn’t usually secured against your car.
• You choose where you buy your car from.
• You own the car, so you can for example swap or sell the car when you like.
• You can choose how much you borrow – either for part or all of the car.
• You choose the term you repay the money over.
• No excess mileage charges.
• No deposits or balloon payments.
• A personal car loan can be used to purchase any type of vehicle including vans and caravans.

Cons of a car loan

• You usually need a good credit score to get a low rate of interest.
• The monthly repayments can be higher than other forms of car finance because you normally borrow an amount for the full value of the car.
• You will need to arrange and pay your own tax and insurance - and other maintenance costs and upkeep of your car.

What other ways can I finance my car purchase?

There are five main types of car finance - you can find out more about them here.