Car finance or bank loan - which is the better option?

If you’re in the market for a new car, there are several ways you can pay. If you have savings or a car to offer as part exchange, you can use those for full or part payment. If you don’t have the cash in the bank, you could choose a personal loan or car finance.

Let’s take a look at the differences between car finance and bank loans.

Zuto is a broker not a lender. Rates start from 9.9%, Rep 21.4% APR.

How does car finance work?

When considering car finance, you need to look at more than how much you need to borrow and for how long. You need to consider the different options and work out which is best for your budget and your circumstances.

What is hire purchase?

Hire purchase, also known as HP car finance, is a way to spread the cost of a car, plus interest, over a number of years. When you’ve found a car you like, you put down a deposit and pay the rest across a number of equal monthly instalments.

The car is used as security against the loan, which means you’ll own it when  the final payment is made.

Who is hire purchase suitable for?

If you want a finance option that allows you to repay a loan in regular monthly instalments with the reassurance of owning the vehicle after the final payment is made, then hire purchase could be a good option. 

Customers typically take hire purchase agreements out for 2-5 years and once you’ve agreed your terms, your repayments and APR won’t change.

What is personal contract purchase?

Personal contract purchase, also known as PCP finance, allows you to spread the cost of a car, plus interest, over a number of years and hand it back at the end of the contract if you no longer want it. The car remains the property of the finance company but you can take ownership of it by making a final payment at the end of the contract - which is also known as a balloon payment.

Who is personal contract purchase suitable for?

If you want a flexible contract that offers options at the end of the term, such as being able to buy the car or hand it back, then PCP could be a good option. If you like to change your car frequently, this can be a good way of buying a new car every few years.

This type of contract sometimes comes with lower monthly repayments than other types of finance because you’re only paying the depreciation value of the car and not the full value at the time of buying.

To find out more about these types of finance, check out our guide to HP and PCP car finance.

How do car personal loans work?

A car loan is another way to spread the cost of your car over a number of years, but it works a little differently from car finance. Unlike HP and PCP,  you own the car outright as soon as the money is paid to the seller and the loan isn’t secured against the vehicle

Who is a personal car loan suitable for?

If you want to own your car outright from the beginning of the contract, a personal car loan could be the way to go. But bear in mind that you’ll probably need a good credit score to be eligible as the car isn’t used as security against the loan. 

When you compare car finance with Zuto, our team will be on hand to talk you through all the options to help you make an informed decision on what’s best for your circumstances and budget.

What are the differences between car finance and bank loans?

When considering your car buying options, you might also consider a bank loan. This will usually be an unsecured personal loan and the lending terms will be based on your current circumstances and the information on your credit file.

Here’s a breakdown of the differences between loans and finance, along with some of the main advantages and disadvantages.

Advantages and disadvantages of car finance

The main advantage of car finance is that contracts are designed to offer flexible ways to buy a car. Other advantages include:

• Spread the cost of buying a car
• Get a newer and more reliable car with each contract
• Fixed monthly repayments can help you budget
• Keeping up with repayments may help improve your credit score
• If you hand your car back at the end of the contract, where applicable you don’t need to worry about depreciation
• Using the car as security could improve your chances of being accepted for credit
• Finance broker will help you find a good roadworthy car rather than search alone

There are some downsides when it comes to car finance, including:

• Only if applicable, finding the money for a deposit and/or a final balloon payment
• Some car finance deals, such as PCP, need you to stick to an agreed mileage limit
• You don’t own the car until the final repayment has been made. This means you’ll need to maintain it but can’t make any modifications
• The car is used as security against the loan, so you could lose it if you don’t keep up with your monthly repayments

Advantages and disadvantages of a personal loan

It’s worth considering all options when financing your car, including personal loans. Here are some of the advantages of taking out a loan to pay for your next car

• You take ownership of the car as soon as it’s paid for
• Personal loans are usually unsecured and can be used for any purpose, not just buying a car. This means you could consider borrowing extra to make modifications or cover other costs
• If you have an excellent credit score and history, you could be eligible for a low rate loan

If you’re considering a personal loan, you’ll also need to consider the disadvantages, such as:

• The loans are unsecured, so may be more difficult to get accepted for
• If you don’t have an excellent credit score, you may be charged a higher interest rate
• Your interest rate might be variable, which can make budgeting a bit more tricky

How much will it cost?

You need to consider costs when working out the best way to pay for your new car. Here are some things to think about before making your decision.

Consider your monthly payments

When working out your repayment schedule, you need to make sure you can comfortably afford the monthly payments. Taking finance over a longer term means you’ll pay more overall but your monthly repayments will be lower, so always factor this in when budgeting.

Our car finance calculator can help you work out how much your monthly repayments will be, along with the total amount you’ll pay back.

Look at the interest rates

The interest rates you’re offered will depend upon your credit score, current circumstances, and the length of time you need to repay the loan. If you take the loan over a shorter period, you’ll pay less interest but your monthly repayments will be higher than if you spread it over a longer term.

It’s important to work out which suits you better - paying less in total or having lower monthly repayments - when budgeting for car finance.

Taking ownership of the car

When you buy a car using HP you will own the car once the final payment is made. But for PCP finance, you won’t own the car until the final balloon payment is made. 

Are bank loans cheaper than car finance?

The cost of your loan or car finance will depend upon things like the amount you want to borrow, how long you need to repay, your current financial circumstances, and your credit score. You’ll need to compare what’s offered by different lenders to work out which is the cheaper option for you. At Zuto, we compare rates from a range of lenders and the type of finance can be tailored to be more flexible based on your needs.

Are there differences when applying?

When you apply for a personal loan, your lender will usually ask what you need the money for but won’t go into specifics. When you apply for car finance, you’ll need to provide more details about the car that you’re buying. This is because personal loans can usually be used for any purpose, while car finance can only be used to buy a vehicle.

When you apply for finance with  Zuto, we’ll compare a panel of lenders to get the best available rate and help you find your perfect car. If you apply for a bank loan, you’re often limited to the rates they are currently offering.

Considerations for poor credit

If you have a poor credit score, it could be because you’ve handled credit badly in the past or you’re a young driver that’s not yet built a credit history. In either case, having a poor credit score can make getting a loan or finance more difficult. When you apply for a personal loan, banks often require a stronger credit score and better credit history, especially for lower-rate loans.

At Zuto, we partner with a number of lenders who specialise in helping people with bad credit secure car finance. If your credit score is low, you might be able to improve your chance of acceptance for credit by offering a bigger deposit which means you’ll need to borrow less.  

Give us a call now on 01625 619 944 or get a quote using our online application.