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 😀
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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 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.
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.
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.
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:
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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