Should I get a loan or car finance to buy a car?

Although the cost will depend on your credit score and the loan’s interest rate, financing a car allows you to own the vehicle outright and can also be a cost-effective option.

Car financing operates a little differently because you don’t own the vehicle until the finance is fully repaid. With some forms of auto financing, however, you have the option to return the vehicle, which is not possible if you purchase a vehicle using a loan.

Continue reading to discover when you might choose car financing or a loan to buy a car, as well as the advantages and disadvantages of each choice.

Loans versus auto finance

With a personal loan, you can spread the cost of a car over a number of monthly payments at a fixed interest rate. Maximum terms are seven years.

The contract is with the lender, which is typically a bank or an online lender; it has nothing to do with the location at which you decide to purchase your car. You can use the cash to cover the entire price of a new car or just a portion of it.

Your income and credit score will determine the cost of the personal loan, with borrowers with excellent credit scores receiving the lowest rates.

You can spread out the cost of a new car over a number of monthly payments (with interest) if you use car finance, but you’re not working with an independent lender; rather, you’re working with a car finance provider.

According to the type of car finance you have, you can either pay a lump sum to keep the car, trade it in for a different model, or return it after making monthly payments for the duration of the contract. Typically, you pay a deposit at the beginning of the contract and then monthly payments throughout the term of the contract.

 Here we outline the main differences between buying a vehicle with a loan and with car finance.

Personal loan Car finance
You take out a predetermined loan and pay it back over a predetermined time period in installments. Following a down payment, you make fixed-price monthly payments for a predetermined time.
You might be eligible for a low interest rate if you have a high credit score. Car financing might be more affordable than an unsecured loan if your credit is less than stellar.
Since your debt is with a financial institution and not the dealership, you already own the vehicle. While you are paying off the car, you do not own it. You have the option to take ownership of the vehicle when the lease expires or return it (depending on the type of agreement you have).
You could eventually lose money because the car’s value will decrease over time. Depreciation won’t be a concern if you return the vehicle at the end of the lease.
You are in charge of the vehicle and are free to make any modifications and use it as much as you like. There are restrictions on how many miles you can drive as part of PCP car finance agreements, in addition to other terms.

Perks of auto financing

It divides the price of a new car into manageable payments.

If you have a hire purchase or PCP agreement, you can decide to return the vehicle.

Various car financing options are available to accommodate various spending limits and tastes.

You might be able to purchase a car that costs more than you could afford to pay for outright.

You can cancel your auto loan and return your vehicle if your financial situation changes and you are unable to make the payments.

Cons of auto financing

Typically, the interest rates are higher than those of a personal loan.

Until the contract has expired and all required payments have been made, you do not own the vehicle.

Your credit score will suffer if you don’t make payments, and your car may be repossessed.

If you go over any mileage allotments in your PCP contract, there could be a fee.

You’ll be responsible for covering any repairs if the car needs to be fixed after you return it.

A personal loan’s benefits and drawbacks

Depending on your credit score, a personal loan might end up being a more affordable option overall for purchasing a car.

Advantages of personal loans

Personal loans may be among the least expensive methods of borrowing money due to their interest rates.

The car is yours once you purchase it, and you are free to sell or modify it at any time.

Not only from a dealership, but from any seller, you can purchase a car using the funds.

Drawbacks of personal loans

To qualify for the best interest rates, you must have an excellent credit score.

You won’t get as much money back if you sell the car because its value will have decreased.

In comparison to PCP car financing, monthly payments can be higher.

Is a loan or car finance more affordable?

Your credit score, your income, and the kind of car you want are just a few of the variables that determine which financing option is more affordable between a personal loan and a car lease.

A loan is probably less expensive than car finance if you have good credit and access to the best rates.

However, because you don’t pay interest, paying cash will probably be the most affordable way to purchase a car.

You must total up all of the expenses to determine whether car financing or a loan offers better value for your money. This covers any down payment you’re required to make, the contract’s interest, and any possible fees.

You can compare quotes to determine what rates and offers you qualify for, and then use this information to assist you in locating the most affordable choice.

But you shouldn’t limit your thoughts to price. You should also think about things like how important it is for you to legally own the car and whether you plan to change cars in the near future.

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Where can I get a personal loan or financing for a car?

Both personal loans and car finance options are widely available. A car finance deal is typically arranged through a dealership or a finance provider, whereas a personal loan can typically be applied for from a bank or online lender.

Whatever you decide, it’s always a good idea to shop around to ensure that you’re getting the best deal possible and that you can afford it. It’s also worthwhile to see if you can raise your credit score so that you can access even more affordable rates.

Here, you can compare auto financing and find out which offers you qualify for.

Alternately, you can look into and compare personal loans to see what rates are available if you’d rather own your car outright from the start.

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