Car finance and personal loans both let you drive away in a car without paying the full price upfront, so it's easy to treat them as the same thing. But they work differently on who owns the car, what happens if money gets tight and who you turn to if the car goes wrong.
Car finance isn't a personal loan, because with most car finance the finance company buys the car and you pay to use it until the final payment. A personal loan works the other way round, putting cash in your account so the car is yours from the day you buy it.
A personal loan is a fixed sum you borrow from a bank or other lender and repay in fixed monthly instalments over a set term. The lender usually takes no security for it, so it has no claim on the car or anything else you buy with the money. And because that money lands in your account first, you buy the car as a cash buyer, from a dealer or a private seller.
Car finance is a group of agreements that spread the cost of a car over monthly payments, and in most of them the finance company owns the car while you pay. The four main types differ in whether, and when, the car becomes yours:
Because the finance company buys the car rather than handing you money, HP, conditional sale and PCP are credit agreements but not loans. PCH, as a rental, isn't borrowing at all.
HP and PCP are usually described as secured car finance, because the finance company owns the car until you've paid everything. That ownership gives it the same practical protection as security, so it can take the car back if the agreement ends because you've fallen behind.
A personal loan lender has no such protection, so it can't take your car, although it can still chase the debt through the courts.
Missing payments on car finance can lead to the finance company taking the car back, while a personal loan lender would take you to court instead. Even then, the finance company can't act straight away. The Consumer Credit Act 1974 says it must first send you a default notice and give you time to catch up before it ends an HP, PCP or conditional sale agreement.
Your protection grows once you've paid one-third of the total amount payable (what the Act calls the 'total price'), because the car then counts as 'protected goods'. From that point, the finance company needs a court order to take it back unless you agree to hand it over.
For a personal loan, the court route starts with the lender defaulting the account and recording the missed payments on your credit file, and it can end in a County Court Judgment (CCJ).
You can settle either one early, and car finance also gives you a second way out called voluntary termination. Settling early is your right under the Consumer Credit Act 1974 on any regulated agreement, and you'll usually get a rebate on interest you haven't used yet. The lender's settlement figure shows the exact amount, with that rebate taken off.
Voluntary termination lets you hand back a car on a regulated HP, PCP or conditional sale agreement at any time before the final payment, and you'll owe no more than half of the total amount payable. If you've paid less than half, you top up the difference (with conditional sale, only while the car isn't yet yours). With PCP, that total includes the balloon payment, so the top-up can be bigger than you'd expect. On top of any top-up, you'll pay for damage beyond fair wear and tear.
A personal loan has no equivalent to voluntary termination, but because the car is already yours, you can sell it whenever you like and use the money to clear the loan.
With HP, PCP or conditional sale, the finance company counts as the supplier of the car under the Consumer Rights Act 2015, so you can take a complaint about a faulty car straight to it. If it doesn't resolve the problem, you can take the complaint to the Financial Ombudsman Service.
With a personal loan, the lender only gave you money, so your claim is usually against the dealer that sold you the car. Nor can you normally turn to the lender under section 75 of the Consumer Credit Act, which only applies when the lender has an arrangement with the seller and the car costs over £100 and up to £30,000. That arrangement can exist if the dealer introduced you to the loan, so in that case it's worth asking the lender whether section 75 applies.
Buy privately and your rights are narrower again, because the Consumer Rights Act only covers cars sold by a business.
Neither is always cheaper, because the cost depends on the APR you're offered, how long you borrow for and any fees. The APR rolls interest and those fees into one yearly percentage, which makes it the easiest figure to compare. But an advertised representative APR only has to be the rate the lender expects at least 51% of successful applicants to get or beat, so your own rate can be higher.
Your credit score is one of the biggest influences on the rate you're offered, as this example of £15,000 borrowed over 48 months shows. The APRs are illustrative figures we've chosen to show the effect, not real offers.
| Personal loan (fair credit) | HP (fair credit) | Personal loan (excellent credit) | HP (excellent credit) | |
|---|---|---|---|---|
| Amount borrowed | £15,000 | £15,000 | £15,000 | £15,000 |
| Illustrative APR | 26.9% | 13.9% | 2.9% | 7.9% |
| Monthly payment | £489.53 | £403.05 | £331.10 | £363.58 |
| Total of 48 payments | £23,498 | £19,347 | £15,893 | £17,452 |
| Total interest | £8,498 | £4,347 | £893 | £2,452 |
In this example, HP works out £4,151 cheaper than the loan with fair credit, because a finance company that owns the car has something to recover if you stop paying and can often charge less for the risk. With excellent credit, that advantage matters less, and the loan comes out £1,559 ahead. Both HP totals would rise slightly once you add any option-to-purchase fee, which the table leaves out.
And because these rates are illustrative, a real quote can easily reverse either result, so compare the total amount payable on actual quotes rather than the monthly figure alone.
PCP usually gives the lowest monthly payments, because you're paying off the car's expected drop in value rather than its full price. The trade-off for those lower payments is the balloon payment at the end if you want to keep the car, plus a mileage limit and charges for damage beyond fair wear and tear. So a lower monthly figure doesn't always mean a lower total cost.
A personal loan lets you buy from any seller and change the car however you like, because it's yours from day one.
Car finance is more limited on both counts, because the finance company owns the car. On the first, most car finance is arranged through dealers, although some lenders do offer car finance for a private sale. On the second, modifying a car on finance usually needs the finance company's consent, and unapproved changes could breach the agreement.
Car finance and a personal loan differ mainly on ownership, consumer rights and what happens if you stop paying, as this summary of the sections above shows for HP, PCP and conditional sale.
| Car finance (HP, PCP, conditional sale) | Personal loan | |
|---|---|---|
| Who owns the car during the deal | The finance company | You |
| Who you complain to about a fault | The finance company | The dealer that sold the car |
| Can the car be taken back if you miss payments? | Yes (a court order is needed once you've paid one-third, unless you agree) | No, but you could face court action and a CCJ |
| Ending early | Settle early, or hand the car back at any time and owe no more than half the total amount payable | Settle early, or sell the car and repay |
| Buying from a private seller | Only with some lenders | Yes |
| Modifications | Usually with the lender's consent | Yes |
| Mileage limit | PCP only | None |
| Lowest monthly payment | Usually PCP | Depends on rate and term |
PCH is left out because it's a rental rather than credit, though it also comes with a mileage limit.
A personal loan suits you if your credit is good, you want to own the car outright from day one or you're buying privately. Car finance suits the opposite situation, where you want lower monthly payments, might want to hand the car back or find loan rates expensive because of your credit score.
Within car finance, PCP is the one to look at if a low monthly cost matters more to you than keeping the car long term. If you're in between, buying from a dealer with a fair credit score, compare HP quotes against a personal loan quote from your own bank, using the total amount payable on each. That loan quote matters because Carplus is paid commission by lenders on the car finance we arrange, so it gives you an independent figure to check our deals against.
Carplus is a credit broker, not a lender, so we search a panel of lenders for car finance deals you're eligible for. That search is a soft search at the quote stage, so it doesn't affect your credit score.
