Personal Loan
If you don’t want to use your new car as security for your loan – or if you’re buying a second-hand car that’s more than six years old, you could opt for a personal loan instead to finance your new motor.
There are plenty of places to look for a personal loan – from your high street bank to a whole host of online lenders – and the loan term, conditions, and cost can vary widely, so it’s really important to shop around.
As an unsecured loan, a personal loan is riskier for the lender – so this kind of motor finance may cost you more than a car loan. BUT it can offer a lot more flexibility, especially if you want the freedom to sell the car at any time.
Most personal loans are for a term of three to five years. If you do want to pay out the loan early – because you sell the car or get the funds another way – there is a pitfall to watch out for. Some personal loans, especially if they have a fixed interest rate, will hit you with a hefty penalty for early repayment. So be sure to check the terms and conditions of your loan when you sign up!
Get the best deal on car finance
Find your ratesPersonal Loan Pros and Cons
Pros:
- The greatest advantage of a personal loan is how many lenders there are to choose from. That means that you can shop around to find a competitive rate and the terms and conditions you want. Even if you don’t have a great credit rating you might still be able to find a lender willing to work with you, although generally at a higher cost.
- Since you won’t be using your new car as collateral for your motor finance, you’ll own your vehicle outright and will be free to sell it at any time. And you won’t have to use the proceeds from selling your car to pay out the loan if you want to use the money for something else – although you’ll of course have to keep paying your loan repayments.
- If you opt for an online lender, the application process for a personal loan is usually quick and easy, with a fast response. You could have access to the funds within a matter of hours with some lenders – which can be especially useful if you’re planning to buy a second-hand car and need the flexibility to act fast when you find the right vehicle.
Cons
- A personal loan is likely to be more expensive than a secured loan because of that higher risk to the lender – and if you have a variable interest rate and rates go up, you could end up paying a lot more than you bargained for down the track.
- You won’t have the back-up of an independent valuation by the lender when you buy your car. This is really only an issue if you’re buying second-hand, but it means you’ll need to be extra careful when settling on a purchase price because you’ll be locked into the loan even if the car turns out to be worth much less than you paid for it.
- There are some unscrupulous lenders out there. The ‘fintech’ lending market isn’t as tightly regulated as banks, so you need to be careful to check the terms and conditions and make sure you understand the full cost of the loan (including any penalties or hidden charges) before you sign.
Other car finance options
1. Car Loan
Perhaps the most obvious motor finance option is a car or vehicle loan. The key feature of this kind of finance is that it is a secured loan, where you use your new car, motorbike, or other vehicle as collateral.
2. Mortgage
If you own a property and have built up some equity, you might be able to fund your car purchase by redrawing on your mortgage.
3. Hire Purchase
Hire purchase is very different from a car loan or personal loan. With this type of motor finance, YOU are not actually buying the car, and you won’t own it until the end of the contract.
4. Lease Finance
It’s basically a rental agreement – like with hire purchase, the finance company will buy the car for you and then lease it to you in exchange for regular payments over an agreed period.
