The Ins And Outs Of Car Loans

One of the best and cheapest ways to purchase a car is with a personal loan. This is especially true as the rates on these financial products have decreased dramatically over the last couple of years. However, is it the right option for you?

In the the following post we will look at the ins and outs of car loans to give you the basics on these financial products, how they work, as well as the pros and cons of them.

Car Loan Options

So, you want to buy a car, but (like most people) don’t have enough money to buy it outright. You need to buy one using a loan of some description this may be from a company such as Whether you are looking to buy a brand new car or a used one, there are two main car loan options open to you-

  • Hire Purchase Deal
  • Personal Loan

Hire Purchase

Hire purchase or leasing is when you pay some money upfront and then make regular monthly payments for a car, that you can use while keeping to those payments. At the end of the leasing period, you can simply return the car or pay to buy it (which is an option many people take if its a very new car that is in good condition). This is not nearly as popular as the loan method of purchasing a car – though it has become more common in recent years. The key thing to remember is that, even during the lease term, you are not the actual owner of the car. This means if you ever want to modify your car, you can’t if you are leasing. Normally, the leasing company will require that you have your car serviced annually, and at an official and authorised garage.

Personal Loan

This is by far the most popular and common method for buying a car – arranging for a personal loan to cover the cost of the car through a bank or other financial organisation. Obviously, as loans are a money making business and not charity, you have to pay interest along with the pre-arranged monthly repayments.

It makes sense when looking for personal loans that you choose one with as low a rate as possible.

How Do They Work?

If you have a good idea of what car you want to purchase, you can work out the amount of money you need to borrow. This is normally the price the car is for sale, subtracting the deposit the car dealership or trader requires upfront.

You borrow a fixed amount and agree to a fixed monthly payment rate and are normally expected to pay the loan back over anything from 1 to 5 years. The interest rate, as with most financial products of this kind, depends on how much you wish to borrow.

For example, if you are looking to borrow a fairly small amount such as £1,500, the interest rate will be high – around the 8 to 13%. Whereas, if you want to borrow a considerably higher amount of money, like £15,000 for instance, you may only have to pay interest at a rate of 2.8%.

Before you head to the lender and sign up for one of these deals, particularly if you are basing it on figures that were advertised, you need to note that these figures are ‘representative APR. On average, only around 51% of all people accepted for loans will get these lower rates, while 49% of borrowers are given loans at much higher rates.

The Pros and Cons of Car Loans

Although personal car loans are very appealing and getting one may be the right option for you, there are so many options out there that it can be tricky to choose. Obviously, the sensible approach is to shop around and look at a wide variety of available car loans.

With this in mind then, it is worthwhile looking at the various pros and cons of car loans, before you decide on whether they are best option to help you buy a car or not.


  • They are one of the simplest methods of financing the purchase of a car to understand and organise.
  • They are flexible and have repayment terms from 1 to 5 or even 7 years. The longer the term though, the more interest you will have to pay over time.
  • There are eligibility calculators available online that can help you find loans you will be accepted for
  • As soon as you have transferred cash to the trader or dealer, you will own the car and are able to modify and carry out work on it (something you can’t do when you purchase hire/lease a car)
  • As you are buying with cash, you could barter for a better price
  • Dealer finance rates are higher than personal loan rates, unless you are able to find a 0% finance deal


  • You won’t be accepted for a car loan, unless you have a healthy credit score and history
  • Car loan monthly payments are often higher than the repayments amount of other forms of financing
  • You will be responsible for any repairs or maintenance required for your car, as you are the owner
  • The value of a car depreciates quickly over time, so when it comes to selling it, you will get less money when you first bought it.

So if you are looking to buy a car and can’t afford one upfront, a personal loan might be the right way to go. Be sure to take on board the information above, before you sign or agree to anything though. You should always make sure you that you can and will be able to afford the repayments for your car loan, not just in the present but also far into the future.

This is a crucial point, as financial problems can arise at any time. However, if you have secure employment and your home life is not likely to change in a way that it will affect your finances, car loans are a great way to get the car you really want.