Car loans in a nutshell
What do I need to know about car loans?
Unlike some other car finance options, a car loan will allow you to keep your car once you’ve paid it off in full. Usually, a car loan is an unsecured personal loan. This means that the loan isn’t secured against your property. Instead, the lender will let you borrow money to buy a new car, and you’ll pay it back (with interest) in monthly instalments over the loan term.
As with any big financial decision, you’ll want to be thorough with your research before deciding which car finance option is right for you. Running a car loan comparison is a good place to start. From there, you’ll be able to see the best car finance deals available to you.
Not sure how to run a loan comparison? Check out our guide to comparing loans.
Will I be eligible for a car loan?
Whether you’re eligible for an unsecured personal loan depends on many factors, one of which is your credit score. If you have a high credit score, it’s likely you’ll be eligible for better car loan rates. If you have a low credit score, your rates are likely to be higher and it’s possible you won’t meet the lenders’ eligibility criteria.
To find out more, read our guide on how to improve your credit score.
What do I need to think about when comparing car loans?
If you have multiple car loan options, you’ll want to try to work out which one is best for you. First, ensure you can afford the monthly repayments for the entire loan term. If you miss repayments or default on your loan, it can negatively affect your credit score and your chances of getting a loan, credit card or mortgage in the future.
You’ll also want to make sure you’re comfortable with the APR (Annual Percentage Rate). Not everyone will receive the Representative APR, so make sure you take note of the APR you’re being offered. The lower the APR, the better.
Finally, make sure you’re aware of any additional costs, fees and terms that come with your car loan offer. Read the terms and conditions carefully before you proceed.
What other ways can you finance a new car?
Unsecured personal loans aren’t the only way to finance a new car. Here are a couple of alternatives and what you need to consider.
- Hire Purchase (HP) – this is a type of credit agreement where you pay for your car in monthly instalments. Usually, you’ll need to put down a deposit first, and then you can spread the cost of the car (with interest) over a fixed repayment term. Be aware though, you don’t own the car until the last payment has been made.
- Personal Contract Purchase (PCP) – this type of agreement allows you to lease a car with the option to buy it at the end of the payment term. You’ll pay a deposit at the start of your agreement, then make monthly payments (with interest) for the lease term. At the end of the term, you can choose to pay a balloon payment if you want to own the car, or you can give the car back to the dealer.
Getting help with your finances
If you find yourself in financial difficulty, you can get free, impartial advice from The Money Advice Service. Give them a call on 0800 138 7777 or visit their website.
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