Is Car Finance the Same as a Personal Loan?

If you’re considering purchasing a new car, you may wonder if car finance is a personal loan? You may have heard these terms flung around without feeling sure of the differences. If so, this article is for you.

Car finance deals are specifically for purchasing a vehicle and require the vehicle to be fully paid off before ownership can be established.

Ultimately, the answer to this question is no; car finance is not the same thing as a personal loan. Read on to discover the differences between these two options to help you decide how you should finance a car purchase.

Put simply; car finance is not classed as a personal loan. A personal loan, whether from a bank or other lender, can be used for many different purposes. How you spend the money is entirely at your discretion, meaning you can put it toward almost anything, not just a new car. By contrast, car finance can only be used to pay for a car.

What is a Personal Loan?

A personal loan is a type of unsecured loan that allows you to borrow a lump sum of money from a lender, which you can use to purchase a car or cover other expenses. Personal loans are typically offered by banks, online lenders, and other financial institutions. With a personal loan, you can borrow a fixed amount of money, which you repay over a set period of time, usually with fixed monthly payments. Personal loans are often used to finance car purchases, but they can also be used for other purposes, such as consolidating debt, financing home improvements, or covering unexpected expenses.

What is Car Finance?

Car finance refers to a range of financial products and services that allow you to purchase a car without paying the full amount upfront. Car finance options include hire purchase (HP), personal contract purchase (PCP), personal contract hire (PCH), and leasing. With car finance, you can spread the cost of the car over several years, making monthly payments to the lender. Car finance is often secured against the vehicle, meaning that the lender can repossess the car if you fail to make payments.

Is car finance secured?

There are certain types of loans called secured loans. This term means that the loan is tied to a particular asset—which, in this case, would be the vehicle you’re purchasing. A car loan is a type of secured loan where your car acts as collateral, meaning that it could be repossessed by your lender and sold to settle your debt if you fail to pay back your loan on time.

Whether or not your car finance can be described as a secured loan depends on the type of car finance you choose.Hire Purchases (HP), Personal Contract Hires (PCH), and Personal Contract Purchases (PCP) are all secured loans.

Car finance vs personal loan: what's the difference?

This article has already covered a couple of significant differences between car finance and personal loans. But there are others that you should be aware of before you decide how you want to finance a new vehicle purchase.

Personal loan car finance allows for immediate ownership of the car without using the car as collateral.

The table below outlines a few of the main differences between car finance and personal loans.

Key Differences between Car Finance and Personal Loans

While both car finance and personal loans can be used to purchase a car, there are some key differences between the two. Here are some of the main differences:

• Ownership: With a personal loan, you own the car from the start. With car finance, you may not own the car until the end of the agreement.
• Security: Personal loans are unsecured, while car finance is often secured against the vehicle.
• Interest rates: Car finance interest rates can be higher than personal loan interest rates, especially for those with poor credit scores.
• Repayment terms: Car finance repayment terms can be longer than personal loan repayment terms, often up to 5 years or more.
• Fees: Car finance may come with additional fees, such as arrangement fees and documentation fees.

Pros of car finance and personal loans

When trying to decide whether you should go for car finance or a personal loan, you are the only person who can determine whether or not either option has all the features you need. To help you make your decision, here is a list of the benefits of each option.

Cons of car finance and personal loans

As well as thinking about the respective pros of car finance and personal loans, it’s important to consider the cons of each option. This section will lay out a few negatives you may want to consider.

Types of Car Finance

There are several types of car finance available, including:

• Hire Purchase (HP): With HP, you pay a deposit and then make monthly payments to the lender. At the end of the agreement, you own the car.
• Personal Contract Purchase (PCP): With PCP, you pay a deposit and then make monthly payments to the lender. At the end of the agreement, you can return the car or make a final payment to own it.
• Personal Contract Hire (PCH): With PCH, you pay a monthly rental fee to use the car for a set period of time. At the end of the agreement, you return the car to the lender.
• Leasing: With leasing, you pay a monthly rental fee to use the car for a set period of time. At the end of the agreement, you return the car to the lender.

Interest Rates and Repayment Terms

Interest rates and repayment terms for car finance and personal loans can vary depending on the lender, your credit score, and other factors. Here are some general interest rate and repayment term ranges for car finance and personal loans:

• Car finance interest rates: 5-15% APR
• Car finance repayment terms: 2-5 years
• Personal loan interest rates: 3-12% APR
• Personal loan repayment terms: 1-7 years

It’s essential to compare interest rates and repayment terms from different lenders to find the best deal for your needs.

Lines of credit available

Different kinds of finance products have differing levels of risk associated with them. Because of this, lenders usually put an upper limit on how much money you can borrow with any given product. While it may not be a problem getting a few hundred thousand pounds for a mortgage, you will find it a great deal more difficult to secure a personal loan for the same amount. Car loans, for instance, are a method of borrowing money from a lender to buy a car upfront, with associated repayment terms. These loans typically have different limits and terms compared to personal loans.

Your lender will decide these limits based on your particular circumstances. Generally speaking; however, secured loans have a relatively high upper limit, since the risk associated with them is not as great.

Which option for car payments has the lowest monthly payments?

Cost is another important factor in choosing between car finance and personal loans. If you're looking for the car payment option with the lowest monthly payments, it may be worth considering a PCP finance plan. With a PCP agreement, you're not paying the full value of the vehicle; rather, you're paying the cost of how much the car is expected to depreciate. Because of this, your monthly payments are kept relatively low.

When you reach the end of your deal, you can choose to either trade in the car or pay a larger ‘balloon ' payment to take ownership of it.

Which car payment option is the cheapest?

People who are looking to buy a new car usually try to find deals with low-interest rates. However, your interest rate is dependent on your credit score and credit history. If you do not have a favourable credit score, you'll find you'll have to pay higher rates than you would otherwise. People with especially bad credit scores may have to rely on car finance, as many lenders will not grant people with low credit scores personal loans.

The table below shows how your credit score can impact your interest rates and overall cost paid. It shows that for individuals with a fair credit score, car finance—hire purchase, in this particular example—tends to be the cheaper option, while for individuals with excellent scores, personal loans are usually the cheaper option.

Is a personal loan better than car financing?

Whether or not a personal loan is a better choice for you than car finance depends entirely on your financial situation. Personal loans do have some benefits over car finance plans; for example, you'll own your vehicle on the day of purchase and will face fewer restrictions than you would buying a car on finance.

On the other hand, for some people, personal loans are less than ideal. The best interest rates are reserved for those with good credit scores, and your monthly repayments may end up steeper than they would with a car finance plan.

Is it easier to get car financing than a loan?

Again, whether car finance is easier to get than a personal loan depends on your financial circumstances. Generally speaking; however, it may be less expensive for those with low credit scores to use a car finance plan over a personal loan. Due to the secured nature of car finance options, they can be a cheaper option for people with bad credit.

What's the best way to finance your car?

When deciding between car finance plans and personal loans, it's important that you carefully weigh the pros and cons of each. Consider your monthly budget and credit situation. Also, make sure that you're fully aware of any restrictions or criteria you'd have to meet for a particular loan.

You should also decide whether you want to purchase a car from a dealership or a private seller and determine whether you want to own the vehicle at the end of the finance deal or not.

You should ask yourself all these questions before reaching a final decision.

Reach out to our brokers for advice and assistance

If you have any more questions about financing a new car, or if you'd like assistance in finding the right finance scheme for you, reach out to our expert brokers here at Carplus! We've helped hundreds of people finance their dream cars and can help you with the same.