Should I Get Car Finance Or A Bank Loan?

Deciding how to finance your new car is an important decision and two of the most popular options available are car finance loans and traditional bank loans.

Each of these has its own set of pros and cons, and its important to compare them when trying to choose the right option for you 👍

In this useful guide, you’ll discover what bank loans and car finance are, and how they compare 😀

Got a specific question? Why not jump to:

How does car finance work?

Car finance is a popular option for those looking to buy a vehicle without paying the full cost upfront.

It involves taking out a secured loan specifically for the purchase of a car, with various types available to suit different needs and preferences.  During your loan agreement this vehicle is legally owned by the finance lender and the loan is secured against the value of the car.

Understanding the types of car finance can help you make a more informed decision tailored to your specific needs. Here’s a summary of the main types available:

Hire Purchase (HP)

Hire Purchase car loans let you pay monthly, and after an initial (optional) deposit you pay back instalments that cover the entire cost of the vehicle, including interest.

At the end of the term, once all payments are made, you pay the option-to-purchase fee and the ownership of the car transfers to you.

It’s ideal if you want to own the car outright at the end of the agreement without having to pay a large sum upfront.

Diagram explaining how hire purchase (HP) finance works

Personal Contract Purchase (PCP)

PCP is a more flexible option, where following a deposit amount you typically pay lower monthly instalments over the term.

You then have the choice at the end to either return the car, keep it by paying a final ‘balloon’ payment, or trading it in for another car.

This option is great for those who want lower monthly costs and like the idea of changing cars regularly.

Leasing is another form of car finance, letting you use the car for a specified period in exchange for regular payments. However, you won't own the vehicle at the end of the term.

Diagram explaining how personal contract purchase (PCP) finance works

More car finance guides

How do bank loans work?

A bank loan is a personal loan you take out directly from a bank to finance your car purchase.

Unlike specific car finance plans, a bank loan gives you the flexibility to purchase any vehicle without restrictions.

Once you receive the loan, you pay for the car in full, making you the owner from the start.

The repayments on a bank loan are made over an agreed period with interest. The interest rate can vary based on your credit score and the loan amount.

Diagram explaining how personal loans work

Which is right for me? Car finance or a bank loan?

Choosing between car finance and a bank loan depends on your individual circumstances, preferences, and financial goals.

Let’s explore the pros and cons of each option to help you decide:

Pros of car finance

  • Flexible terms, like PCP, allow for lower monthly payments
  • Often easier to obtain than a personal loan, especially with a less-than-perfect credit score

Cons of car finance

  • You may not own the car outright until all payments are made (HP) or choose to pay the balloon payment at the end of the agreement (PCP)
  • Mileage limits and vehicle condition requirements (PCP and leasing)

Pros of bank loans

  • Immediate ownership of the car
  • No restrictions on the car’s age or type

Cons of bank loans

  • Bank loans generally require a good credit score for better rates
  • May have higher monthly payments compared to some car finance options

When choosing between the two, consider factors like your credit score and how long you plan to keep the car.

You should also factor in your monthly budget, and whether you want to own the car outright.

You can see how much car finance will cost you by using a car loan calculator. You can then compare it against how much a bank loan will cost.

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FAQs About Car Finance and Bank Loans:

What are the disadvantages of buying a car with a bank loan?

Disadvantages of using a bank loan to buy a car include potential higher interest rates, especially for those with lower credit scores. 

Is it better to buy a car on finance or bank loan?

Whether it's better to buy a car on finance or with a bank loan depends on your financial circumstances and preferences. Car finance may offer more flexibility and potentially lower rates, especially for those with good credit. Bank loans provide the benefit of immediate car ownership and fixed interest rates.

Is a car loan more expensive than a personal loan?

The cost comparison between a car loan and a personal loan depends on various factors. This includes your credit score, the loan term, and the interest rate. Generally, secured car loans can have lower interest rates than unsecured personal loans, but personal loans offer more flexibility.