Personal Loan

Meaning and Definition

A personal loan is a type of loan that individuals can obtain from banks, credit unions, or online lenders to fund personal expenses, including car purchases. Unlike car finance agreements, a personal loan is not specifically tied to the purchase of a vehicle. Instead, the borrower receives a lump sum amount that can be used for various purposes, including buying a car. The loan is repaid in fixed monthly installments over a predetermined term, typically ranging from one to seven years.

Why it is important to know

Understanding personal loans is important for individuals who prefer to secure their own financing for a car purchase instead of opting for car finance agreements. Personal loans offer flexibility in terms of loan amount, repayment term, and interest rates. Borrowers have the freedom to choose the vehicle they want to purchase, negotiate the price, and make a cash payment using the loan funds. By understanding personal loan terms, interest rates, and repayment obligations, borrowers can evaluate whether it is a suitable financing option for their car purchase.

Example in car finance

Suppose an individual wants to buy a used car priced at £12,000 from a private seller. Instead of obtaining car finance, they decide to apply for a personal loan from a bank. After going through the loan application process, they are approved for a £12,000 personal loan with a repayment term of five years and an interest rate of 6%. The individual receives the loan amount as a lump sum and uses it to purchase the car. They then repay the loan in fixed monthly installments over the next five years, including the principal amount borrowed and the accrued interest.