Is car finance a personal loan?

Getting a car on finance involves borrowing money to pay for a car, which you pay back in monthly instalments (with interest) over a fixed period. Different types of car finance include hire purchase, personal contract purchase and personal contract hire. A personal loan is a different form of borrowing that can be used to buy a car – but it’s not designed solely for that purpose.

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What is financing a car? 

Financing a car enables you to purchase or lease a car by borrowing money and spreading the repayments over a fixed period. This allows people to get a car, even if they can’t afford to pay for one upfront. However, car finance agreements do include interest, which makes them more expensive than buying a vehicle with savings.

There are several ways you can finance a car, each one a little different, providing a range of options suitable for a variety of circumstances. The most popular of these are: 

  • hire purchase (HP) – you pay a deposit followed by monthly repayments. You own the car after you make the final repayment
  • personal contract purchase (PCP) – you pay a deposit followed by monthly repayments. You can either make a lump sum “balloon payment” at the end to buy the car, or hand the car back at no further cost
  • personal contract hire (PCH) – you essentially rent the car for a fixed period. The monthly repayments are usually lower compared to HP and PCP
  • personal loan – you borrow a lump sum of cash to buy a car upfront, then pay the loan back in monthly instalments

Is car finance a personal debt? 

Yes, personal debt is a type of borrowing for which you are personally and legally responsible, so car finance is a personal debt.

Is car finance a secured loan? 

While hire purchase, personal contract purchase and personal contract hire agreements aren’t the same as secured loans, they are tied to an asset - your car. So, in the event you can’t make your car finance repayments, the lender could recover the car and sell it to settle the debt (as a last resort).

It’s also worth noting that, unlike the above-mentioned car finance options, personal loans are unsecured. This means you don’t need to use your car collateral to take out a personal loan.

What is a car loan? 

A car loan is a personal loan that’s specifically designed for the purpose of buying a car. With a car loan, you can buy a car directly from a seller or dealership and own it from the start.

You don’t have to pay a deposit for the car, you just pay the full sum upfront and make your loan repayments each month, safe in the knowledge that you are the legal owner.

If you were to default on your loan repayments, the lender wouldn’t be able to repossess your car to get their money back. However, any missed payments would damage your credit score and could lead to court action, which would impact your ability to get credit in the future.

Car finance vs personal loan 

The main difference between car finance and a personal loan is that you don’t own the car immediately with car finance, but you do with a personal loan. This is because a personal loan is used to buy the car outright. But is one better than the other? Here are the main pros and cons of car finance vs a personal loan.

The pros 

Car Finance

Personal loan

You don’t have to buy the car at the end of the agreement (though you do have the option to buy with PCP)

You own the car as soon as you drive it out of the dealership

Flexibility of finance type: choose what works best for you between HP, PCP and PCH agreements

No mileage, usage or modification restrictions

There are options to terminate the agreement early (such as voluntary termination under the Consumer Credit Act)

You can sell your car whenever you want, and you can keep the sale funds to yourself or use it towards your loan

The cons 

Car Finance

Personal loan

You don’t own the car until you’ve made your final repayment with HP - or the ‘balloon payment’ with PCP

You don’t own the car at any point with car leasing

You’re tied to your loan until you’ve paid it all off

You may face mileage restrictions and potential fees

Can affect your ability to get another personal loan during the original loan term (and afterwards if you have a bad payment history)

Can be liable for wear and tear and other additional costs at the end of the agreement

Lose out on dealership offers that can save you money

Is a personal loan better than car finance? 

There’s no hard and fast rule about whether a personal loan is better than car finance, as it depends on your personal situation and what matters most to you. So carefully consider the pros and cons before you decide.

Is car finance easier to get than a loan? 

There’s no option that’s guaranteed to be easier or harder when it comes to getting car finance, as it depends on your personal situation and the lender’s criteria.

With car finance options such as HP, PCP and PCH, the loan is secured to the car. This means if you fail to make your repayments, the lender can recover the car and sell it to recoup its costs (as a last resort). So, your car acts as a safety net for the lender, meaning they may be able to approve you for finance, even if you have less-than-perfect credit.

However, when it comes to personal loans, the best rates are saved for those with the highest credit scores. This is because personal loans are unsecured, meaning the lender has no safety net tied to the loan. 

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

Disclaimer: All information and links are correct at the time of publishing.

Adele Kitchen, Personal Finance Writer

Adele Kitchen

Personal Finance Writer

Adele is a personal finance writer with more than 10 years in the finance industry behind her. She writes clear and engaging guides on all things loans for Ocean, as well as contributing blogs to help people understand their options when it comes to money.