Can I use a personal loan to buy a car?

Yes, you can use a personal loan to buy a car, if you meet the lender’s criteria. You can use a personal loan to pay for anything you like as long as it isn’t illegal or gambling. Alternatively, you may consider taking out a car finance agreement with a car dealership.

5 min read
woman buying a car

How does a personal car loan work? 

Personal loans are also known as unsecured loans or bank loans. Essentially, you take out a lump sum of money, then pay the lender back in monthly instalments (including interest) over a fixed timeframe.

You can either use the loan to pay for all or part of your car. For example, you may have some savings that you’d like to put towards the balance, which will bring down the amount you need to borrow.

If you have a good credit score, you’re more likely to be accepted and with lower interest rates. This is because it indicates that you can manage your money well, so lenders may see you as low risk to lend to.

A personal loan doesn’t require any of your assets to be used as collateral. So, if you use a personal loan to buy a car, you’ll own the vehicle outright from the word go.

Plus, the car dealership won’t be able to repossess your vehicle if you fall behind on your loan repayments.

However, if you stop making payments, you will damage your credit score and risk incurring late fines. If you default on the loan, the lender may also take court action (as a last resort). Therefore, it’s crucial that you always make your loan repayments in time and in full.

Tip: Use a loan calculator to see whether you’re likely to get approved for car finance before you apply. This won’t leave any mark on your credit report

What happens at the end of the loan? 

Your loan will run for a fixed amount of time, as set out in your loan agreement. When you get to the end of your loan term, the lender should automatically stop taking payments. It’s best to check your bank account and cancel your direct debit to be on the safe side.  

Should I get a personal loan to buy a car? 

Using a personal loan to buy a car is a good financial decision for some people, but not others. This depends on your individual circumstances, so it’s important that you consider the pros and cons of using a personal loan to buy a car.

Pros of a personal loan 

  • you own the car outright – you assume full ownership of the car straight away when you pay for it with a personal loan. So, you don’t need to worry about it being repossessed. Plus, you can make any modifications as you like and sell it whenever you want
  • no annual mileage limits apply – you won’t get fined for adding more miles onto the clock than you anticipated
  • they’re flexible –personal loan terms usually range from one to seven years, and you’re free to purchase a car from any dealer you like
  • they’re simple to set up – you can normally arrange a personal loan online or over the phone (if you’re eligible)
  • you can buy any type of car – you can use a personal loan to buy a brand-new or used car
  • fixed monthly repayments – you know exactly how much you’re going to pay each month for the whole loan period

Cons of a personal loan  

  • you’re responsible for the cost of repairs, maintenance and tax as you own the car outright
  • a longer loan term means more interest overall – consider how long you want to take out the loan for, as you may pay more interest if you spread payments over a long period
  • you need good credit to get the best rates – if you have a bad credit history it’s unlikely that you’ll be offered the best interest rates – or you may be refused a loan altogether
  • you need to pay the loan back in full – you can’t get out of your loan agreement by returning the car. You need to maintain your repayments or sell the car and put the proceeds towards the balance
  • missed payments can damage your credit score – if you can’t afford the repayments you risk damaging your credit score, which could affect your ability to get finance in the future. You may also incur late fines

Should I get car finance or a personal loan? 

If you need to access credit to buy a car, you may want to consider taking out car finance. This is a form of borrowing where you pay the car dealership in monthly instalments, instead of purchasing a car outright using a personal loan or savings.

Whether you should get car finance or a personal loan depends on your individual circumstances. Research your options carefully before making a decision, as it’s a big commitment.

Bear in mind, there are three different types of car finance, which each work differently:

  1. Hire purchase (HP) – HP normally requires a deposit, then you pay the remaining balance back in monthly instalments over an agreed time frame. At the end of the agreement, you may need to pay an ‘option to purchase' fee (of around £100-£200) to assume full ownership of the vehicle
  2. Personal contract purchase (PCP) – This works like HP, however, the monthly repayments are usually lower. Then at the end of your contract, you have the option to either hand the car back, use it towards a new car (depending on your car’s value at the time), or pay the remaining balance to keep it
  3. Personal contract hire (PCH) – there are set monthly payments to hire the car and you give it back at the end of the agreement. There is no option to purchase the car with this type of car finance

Other factors to consider 

On the one hand, car finance has its benefits over a personal loan, such as:

  • it may be easier to get car finance – taking out a personal loan can be difficult if you have a low credit score
  • you may have access to a newer and more expensive car - compared to if you use a personal loan to buy one outright. Just make sure you can afford the payments

But you also need to consider that: 

  • you don’t own the car – the finance provider owns the car until you’ve finished your payment plan (and with PCH there is no option to purchase the vehicle)
  • extra costs may apply – for example, if an annual mileage limit applies and you go over it, or you’re charged for wear and tear at the end of your agreement

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