Loan vs. car finance - what's best for me?

You've navigated the showroom - and defeated the salesman. You've chosen your gorgeous new car. There's just one teeny tiny detail to sort out - paying for it.

Unless you're lucky enough to have the funds to buy a car outright, you've got two main options: getting a car on finance, or buying a car with a loan. Here's what you need to know:

Your options when financing a car

  • Option 1: Apply for a loan from your bank, buy your new car, and then pay an agreed amount every month. The car is yours immediately but it's important you keep up your monthly loan repayments.
  • Option 2: Take out finance in the showroom - either from the dealer or the manufacturer. When you finance a car, you don't own it until the end of the finance agreement, and some finance agreements are structured so you never own the car - more of this later...

Which way should you go?

As with so many things in life, there's no right or wrong answer. Financing your car simply comes down to what suits you best. To help you make your mind up, we've listed some of the pros and cons of each option below.



The low down on loans

There are two types of loan. A secured loan is guaranteed by something substantial you already own, like your house, while an unsecured loan will probably just need you to have a good credit score to prove that you're willing and able to keep up regular payments until the loan's over. At first direct, we only offer unsecured loans.

The benefits of loans are:

  • there's no deposit required (if you have no car to trade in or no cash to put towards it)
  • you can sort it out in advance, giving you all the haggling power of a cash payer
  • if there is no early repayment fee, and if you come into some money, you could settle the loan at any time
  • if you really have to, you could sell the car at any time - though you still have to pay the loan off
  • your monthly repayments are normally fixed.

Getting a loan: what you should consider

  • you need to arrange it yourself
  • you can't really consider the car truly yours until you've finished paying off the loan
  • a bad credit score could hold you back.

How car finance works

Car finance also comes in different shapes and sizes.

Hire Purchase (HP) works a bit like a loan, except you need upfront deposit and the loan is secured against the car. You pay a monthly sum over 12 to 60 months, and at the end, the car is all yours.

Contract Hire (CH) is a bit like leasing. You never own the car, just pay a fixed monthly sum to hire it for a while. At the end of the agreement, you hand the car back and walk away.

Personal Contract Purchase (PCP) is a cross between the two. You finance part of the value of the car over a fixed term, and when that term finishes, you either hand the car back and walk away or pay the rest of what the car is worth and keep it.

The benefits of car finance are:

  • the car dealership may help you arrange it
  • it's probably a better option if you have a weak credit score
  • once you've paid half the value of the car, you can often just hand it back without having to make any more payments.

Getting car finance: what you should consider

  • unlike a loan, you'll have to find an upfront deposit
  • the car is owned by the finance company up until the end of the agreement
  • you can't sell the car without settling the finance
  • with Hire Purchase, the lender can repossess the car without a court order if you haven't paid a third of its value yet
  • in the case of Contract Hire and Personal Contract Purchase, there's an annual mileage cap and you'll be financially penalised for going over it.

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