The different types of car loans
Generally, car loans will only fall under one of two kinds. The first are secured loans, where the car becomes the guarantee for loan repayments. The lender takes the car if you fail to repay your loan. But, because there’s security, the terms of secured car loans can be more flexible. This includes lower car loan rates.
Meanwhile, there’re also unsecured loans which don’t require cars as guarantees. The lender approves you on terms based mainly on your credit score. You only get better loan terms with a better credit profile, like bigger loan amounts. However, because there’s no security, the interest rates tend to be higher.
Secured loans
What do secured car loans have in common? Here are what you should know:
- The dealer owns the car while the loan is active.
- You can spread your monthly payments between 1 to 5 years.
- There’s a required deposit, which is usually 10% of the car price.
- Interest rates are cheaper.
With a hire purchase (or HP), you own the car by settling the final payment. (This is usually a “balloon payment” much bigger than your monthly payment due.) Also, there are no mileage restrictions, so you can use the car all you want. If you’re choosing this option, you should check with your dealer if they offer incentives. Oftentimes they give discounts or contributions to deposits, which can be bigger for new cars.
A personal contract purchase (or PCP) is like a hire purchase, but more flexible. First, you determine the deposit for the car and the term of your loan agreement. (Say, £3,000 and 2 years.) Then, the dealer projects a future value for the car. (For instance, the car will be worth £2,000 after 2 years.) Finally, the dealer deducts this and your deposit from the car price. The resulting difference becomes your loan value. (In our example, for a £15,000 car, your loan value will be £10,000.)
At the end of the PCP, you can:
- Own the car by paying the remaining balloon payment. (This would be the value the dealer projected at the start of the term.)
- Use the remaining balloon payment as the deposit for a new PCP with another car.
- Return the car if you can’t afford the balloon payment.
Be aware, though, that PCP’s put restrictions on mileage. If you exceed the restriction, the dealer may charge you extra for car repairs needed.
Unsecured car loans
Want to avoid using your car as security? That’s fine. An unsecured car loan may be perfect for you, then. Below are the essentials to know about this kind of loan:
- You own the car right away.
- There’s no minimum deposit required.
- There are no mileage restrictions, just like a hire purchase.
A personal car loan is simply a personal loan for purchasing a car. The loan can range between as little as £1,000 to as much as £50,000. It also goes for as short as 1 year, to as long as 10 years. But remember, as with personal loans, lenders will pay close attention to your credit score. To negotiate for the best terms, make sure you can support it with healthy credit.
Another option is to purchase your car with your credit card. Compared to personal car loans, this does have some additional benefits. Firstly, you have more flexibility since you’ll only need to pay a minimum amount monthly. Secondly, if there’s a 0% interest offer, you can save more on your repayments. (This is assuming you fully repay the car loan before the 0% interest period ends.) And lastly, you’ll actually get protection from the lender for any payments between £100 to £30,000.
A word of caution for unsecured car loans: borrow only what you actually need. It’s possible your personal loan or credit card limit may extend beyond the car price. This may then tempt you to take on additional debt, making your overall loan costlier. Also, you should check with your dealer if they’ll accept credit card payments. Not all do, and some may only allow them up to a certain amount.
Standard car loan terms
Whether it’s a secured or unsecured car loan, you should know what’s in the package. The best car loans are those that are most suited to the borrower’s financial circumstances. When applying for a car loan, you should be mindful of the:
- Deposit: How much you’ll contribute upfront towards the car. This isn’t necessary for unsecured car loans.
- Loan amount: How much left you’ll have to pay for the car after the deposit. This will divide into equal monthly repayments over your chosen term.
- Term: How long you’ll have to pay off the car.
- Interest rate: It determines how much interest you’ll pay on the loan. If you’re looking for a cheap car loan, this is what you should negotiate on.
- Balloon payment: For secured car loans, you have to pay a large amount at the term’s end. Ownership of the car transfers to you after this is settled.
- Taxes and fees: These include fees to register your car and sales taxes that the state charges. If you’re with a dealer, they may also charge fees like documentation for your car.
Car loan FAQs
Is car finance a personal loan?
In a way, yes! In fact, most lenders in the UK allow car purchases through personal loans.
Can I get a car loan if I am unemployed?
Sadly, no. All lenders will require that you have some form of regular income. Else, they’ll require a guarantor, someone you know with good credit, to sign as well.
Can I get a car loan with bad credit?
You can try, although there’s no assurance you’ll get the loan. You may want to explore financing through dealers, then, since banks usually have stricter requirements. Otherwise, you should work on raising your credit score first.
What is a secured car loan?
This is a type of loan where the car guarantees the loan repayment. The lender takes the car if you’re unable to pay off the loan anytime.
Can a student get a car loan?
Yes, they can try. As long as they’re older than 18, a UK resident, and a regular income earner.
Can you refinance a car loan?
Sure! Many borrowers do this to save on interest, extend loan agreements, or settle balloon payments. As long as it suits your purpose, we’d recommend it!
Final takeaway
When it comes right down to it, car loans are a serious responsibility. Owning that good-looking car may feel good, but developing financial discipline comes with that. After all, being able to pay off the loan in full is the bigger achievement.
It also helps to deal with a lender who always supports your financial well-being. Don’t have one yet? Consult our comparison table here to find one who can provide you the best terms.
Happy shopping!
Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.