What is a car finance loan?
A car finance loan is a loan you take out for the specific purpose of buying a car. They can be a way of spreading out the cost of the purchase, though like all loans they generally come with interest rates and potentially extra charges or fees.
What types of car finance loan are there?
Car finance generally comes in three different types:
- Personal loan: one option could be to take out an unsecured personal loan, borrowing a certain amount of money over a set period and making monthly repayments. This means you would own the vehicle as soon as the car dealership gets the money – so you’ll be able to sell the car on if you wanted to
- Hire purchase: you could also take out a hire purchase agreement, where you make monthly payments to a car finance company while hiring the car from them. After the final payment you would then own the car. You generally have to put a deposit down. This is usually around 10% of the loan amount, but the more you put down the lower your monthly payments are likely to be
- Personal contract purchase: the third option would be to take out a personal contract purchase. This is similar to a hire purchase in the sense that you put down a deposit and make monthly repayments – and the higher the deposit the lower the payments will probably be. However they are also lower in general compared to hire purchases, as rather than paying off the value of the car brand new, you pay off the value of its depreciation at the end of the contract. Then you make a choice between paying off the rest of the car’s value and keeping the car, returning the car, or taking out a new personal contract purchase and getting another car
It’s also worth mentioning another method you could use. It isn’t technically a loan in this sense, but you could pay for the car using a credit card.
The cost of the car would need to be within your credit limit, and you would have to make sure you make the monthly repayments on time – preferably in full, to avoid paying interest. If you’re late with repayments you could end up in a debt you don’t want.
Who can get a car finance loan?
You generally have to be over 18 to get a car loan, and lenders will often have their own specific requirements. You can find out more by looking at their website or contacting them directly, by phone, email, or post.
It’s worth remembering that you should only apply to loans from lenders who are likely accept you. This is important as too many rejected applications for loans or credit can look bad on your credit report.
How much will a car finance loan cost?
The price of the car loan you take out will depend on:
- The type of loan: personal contract purchases tend to have cheaper monthly payments as you are paying for the depreciation of the car’s value, rather than the car itself
- The deposit you put down: a higher deposit generally means you’ll pay less every month, though it can vary depending on the provider
- The interest you take out: the interest you pay on the loan is essentially how much it costs to take the loan out. The annual percentage rate (APR) gives you a better picture of the cost as it includes fees and charges that apply to the loan. However, remember this rate only has to be offered to 51% of applicants. The actual rate you get will depend on your own circumstances
- Any fees and charges involved: providers can often have different fees attached to their loans, such as late or early repayment fees, arrangement fees, or option to purchase fees. An option to purchase fee is the balloon payment you would make at the end of a personal contract purchase
- Your credit history: your credit history is an important factor in how your loan will work. Lenders use it to decide whether they’ll give you the loan, how much they’ll lend to you, and how much the loan will cost – for example, when they set interest rates. The stronger your credit history the less the loan is likely to cost
How do I apply for a car finance loan?
To apply for a car loan you’ll need your address, contact details, details about your incomings, expenditures and employment. You’ll also need to mention how much you want to borrow, and for how long.
You’ll be able to apply to most lenders by phone, email, through their website, or via a postal form. However before you do, you should make sure you’re in the best place to make a successful application.
Data collected by MoneySuperMarket, accurate as of October 2018
Things to consider before applying for a car finance loan
To give yourself the best chance of being successful when you apply for a car loan, you should bear in mind the following:
- Your spending goals: You should be realistic about the kind of money you can afford to spend. That means considering whether that gas-guzzling roadster will be worth the high monthly payments you’re likely to have to pay
- Your car choices: Also pay some thought to whether you want the car permanently or just for a while, as this could help you decide between the types of loans to take out
- Soft searches: you should avoid making applications until you’re as close to possibly sure that you’ll be accepted. MoneySuperMarket conducts soft searches to tell you how eligible you’ll be for the loans you can get, so you’ll be able to make a more informed decision
- Leasing rules and limits: if you’re leasing a car there may be certain rules you have to respect, such as mileage limits or the condition of the car itself when you return it. Not following these may result in additional fines or charges
- Guaranteed asset protection: guaranteed asset protection (GAP) insurance is helpful if you need to you claim on your car insurance but your provider pays out less than the car was worth when you bought it, GAP insurance makes up the price difference so you can avoid losing money. Read more with our GAP insurance guide
- Shop around: you shouldn’t automatically take out a loan with a car dealership you find the car at, even if you’re really keen to buy it. Take your time to compare other options, so you know you’re getting the best deal possible
Compare car loans on MoneySuperMarket
Shopping around for car loans on MoneySuperMarket is an easy way to find the best deals suited to your needs. All you need to do is tell us a little about why you want the loan, how much you want to take out, and over how long, then you’ll be given a list of quotes tailored to your requirements.
You can then browse through the list and compare your options by the cost of the loan, any fees and charges involved, and how likely you are to be accepted if you apply. Once you’ve chosen the one you want, just click through to the provider and finalise the deal.
Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.