5 August 2020
6 min read
Are you thinking about getting a new car? Not sure how to finance it? There can be a number of ways to pay for a car, including a personal loan.
A personal loan can be used for many different types of purchases, from new and used cars to home renovations. A car loan in the form of a hire purchase deal however can only be used to finance the purchase of a car.
Car finance is different from personal loans that are used to buy a car. Interest rates for personal loans and car finance can vary from lender to lender. Although a personal loan can be used for a variety of purposes, whereas car finance can only be used to purchase a car.
A personal loan can give you instant ownership of a car as you can use the funds to purchase it. You would then be expected to pay all the loan instalments until the loan value and interest has been paid in full.
A car finance product such as Personal Contract Purchase (PCP) will give you the option to make an additional payment to buy the car or to return the vehicle after a set contractual period ends. Carrying out research online on comparison sites will help you decide whether a personal loan or car finance would be suitable for you.
There are a few options when it comes to financing a car. The most common ways of doing this would be either choosing a car finance scheme such as Personal Contract Purchase (PCP) or Hire Purchase (HP).
Personal Contract Purchase (or PCP) allows offers customers to pay for a car over a period normally between 3 and 5 years. It can be best described as a long-term rental, allowing you to use the car until your contract ends. You would pay monthly repayments that usually include interest until the end of your contract. When the contract is due to end, you would get the option to buy the car outright by paying the total remaining cost of the car or to hand to car back to the dealership.
Hire Purchase (or HP) is different to PCP as you would usually pay an initial deposit and will then pay off the entire value of the car in monthly instalments. When all the payments have been made, your HP agreement will end and you will own the car. The monthly instalments will have a set interest rate added to them which will be discussed by a car dealership during the purchase process.
If you would like to get a personal loan for a new or used car as you want to buy is outright, many comparison sites can help you decide which provider is right for you. You should start with an idea of how much you may want to borrow and have worked out how much you can afford to repay each month. Comparison sites will often include a calculator which will help you work out how much you can afford to borrow.
To apply for a loan, you usually have to be:
- 18 years of age
- A UK resident
- Have an annual gross income of £10,000 or more
Although it is worth noting that the lending criteria for a car loan can vary from provider to provider.
In a car loan application, you will normally fill out an application form which will ask for a few details about yourself and how much you wish to borrow. Most providers will have a loans calculator which will estimate how much interest you will pay on the loan as well as what the final amount of the loan will be. This will give you a good idea before you even apply for a loan, how much it is likely to cost you each month.
When you apply for a loan, the lender will conduct a credit check. This check will appear on your credit file as an application for credit. Before applying for a personal loan or car finance it is best to work out how much you can afford to pay each month. As with all forms of loans not repaying your payments on time could affect your credit file, which could impact your availability to get credit in the future. It is important to contact your provider if you are having difficulties making your repayments.
All loan providers must give their customers the chance to pay back their car loan in full, but this could come with an early repayment charge. This information would usually be part of the terms and conditions when taking out a car loan for the purchase of a vehicle. If you want to pay your loan off in full, you’ll need to ask your lender for an ‘early settlement amount’. This is a recalculation of what you owe based on what you have already paid, what interest charges apply and if there are any early repayment fees.
It’s worth looking into whether you would be better off paying the early payment charge or continuing with the repayments. You also have to consider whether you can afford to pay off the car loan or carry on paying the repayments each month. If you have any worry or concerns about your repayments, get in touch with your loan provider as soon as possible.
The first thing to do is to contact your loan provider. If you miss repayments you may be charged a fee plus interest. Missing any repayments could also affect your credit rating which could impact your availability to get credit in the future.
If you have a car or personal loan with The Co-operative Bank and are having trouble repaying your loan, visit our dedicated help page.
Comparing the total cost of borrowing including interest rates and charges. This will help show which type of borrowing is best for you. It’s also good to check whether you can afford the monthly personal loan or car finance cost as well as the running cost the car you would like to buy.
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