Car loans explained

Want to own a car but need help with the upfront cost? A car loan may make it easier to buy the vehicle you’re after – whether it’s a sporty soft-top, a family estate car or a well-loved old car. Read on to learn how car loans work and how to find a cheap one.

What is a car loan?

A car loan is typically a personal loan (also called an ‘unsecured loan’). Personal loans can be used to spread the cost of most big purchases. But because they’re often used to buy a car, you’ll sometimes see them called ‘car loans’.

How do car loans work?

A car loan lets you borrow a lump sum of money to buy a vehicle. It may cover some or all the cost, depending on how much you borrow and the price of the car. You’ll make monthly payments to repay the car loan plus interest and any fees.

How much can I borrow with a car loan?

Car loans typically start at £1,000. Many providers offer up to £25,000 although some may go up to around £50,000. If you need to borrow a large amount, you may want to consider car finance as an alternative.

Getting accepted for the biggest car loans often requires a good credit score and a higher income. Experian makes your search easier by showing you car loans you’re eligible for.

Remember, fitting car loan payments into your monthly budget shouldn’t be a squeeze. Only borrow what you can comfortably afford. Missing a car loan payment will lower your credit score and may lead to fines, a default and even legal action.

How can I find a car loan?

Compare car loans from across the UK market with Experian. Searching is free, takes a few minutes and will never affect your credit score. Also, we’ll calculate your chances of approval using your unique data so you can apply with confidence.

How much will a car loan cost me?

The price tag of a car loan depends on several things, including the Annual Percentage Rate (APR) and the number of months you pay interest for.

Hunting for the cheapest car loan? Here are some tips to consider:

• Use a comparison tool to search offers from various providers
• Vary your search criteria to find the best results
• Improve your credit score to boost your chances of getting lower car loan rates

What is a good APR for a car loan?

The average APR for a car loan will depend on what deals are available at the time so it’s worth shopping around. Personal loans are often the cheapest way to borrow money to buy a car if you have a good credit rating and can get access to the best deals.

Are there other ways to finance a car?

Yes. Car loans are one way to spread the cost of a vehicle, but there are several alternatives. Below are three different types of car finance you may want to consider.

• Personal Contract Purchase (PCP) – with PCP you don’t have to buy the car unless you want to. Instead, you pay the lender for what the car loses in value while you’re using it. At the end of the agreement, you can buy the car, give it back or exchange it for another.
• Hire Purchase (HP) – with HP you make payments towards the cost of the car. You’ll only own the car once you’ve made the final payment. If you don’t keep up with the payments the provider may reclaim the vehicle.
• Car Leasing – this type of agreement doesn’t give you the option to buy the car. Instead, you make monthly payments to borrow it for a set period.

Which is better: a car loan or car finance?

When it comes to the pros and cons of a car loan compared to car finance, it really depends on what you want.

One of the main differences is that a car loan lets you own the vehicle from the start of the agreement. This means you call the shots when it comes to your car. Your provider can’t restrict your mileage, stop you from making modifications or repossess the car without a court order. Also, you have the freedom to buy the vehicle from any dealer or private seller.

Prefer not to commit to car ownership? A PCP or car leasing agreement may be more suitable for you. You’ll have sole use of the car but the freedom to return or exchange it at the end of the agreement.

If car ownership is your goal, you may find it easier to borrow a larger amount with a HP agreement. This is because, unlike a car loan, a HP agreement uses your car as security and requires you to put down a deposit of around 10%.

Below is a summary of some important differences between car loans and car finance.

Will a car loan provider check my credit score?

Yes. When you apply for a car loan, the provider will calculate your credit score to help them decide whether to lend to you. Each lender has their own way of doing this. Most use information from your credit report, your credit application, and their own records if you’ve been a customer before. Get an idea of how lenders see you by checking your free Experian Credit Score.

What should I consider before buying a car?

Car ownership is a big undertaking. Here are some important things to consider before buying a car with a car loan.

• Costs of running a car. On top of your car loan payments, you’ll need to shell out for car insurance, road tax, fuel, MOTs, maintenance and repairs. That’s not to mention smaller costs such as parking fees.
• Changes to your finances. Everything from redundancy to having a child can affect your financial situation. Have a plan for how to manage car payments if your income or expenses change.
• Depreciation. Cars typically lose their value over time (called depreciation). Brand new cars tend to depreciate quickly. If you sell your car before paying the car loan off, there’s a chance you may get back less than what you still owe.

Can I pay off a car loan early?

Yes. Because car loans are typically unsecured, you can usually make overpayments up to £8,000 within 12 months without having to pay a penalty fee. Paying your loan off early may help you save money on interest.

Ask your lender for an early settlement figure to find out:

• How much you’ve paid so far
• How much you still owe
• How much interest you’ll have to pay
• If there’s an early repayment fee