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Should I Get Car Finance Or A Personal Loan?

Looking for a new car? Good one! 😀 Lots of fun ahead looking for your dream car, but needless to say that involves a lot of financial decisions too. 😚 No worries, let us give you a hand. The primary concern for car buyers is of course where to get the cash. Once you've decided on the make and model of the car you want to get next, you need to do a bit of research to find the best financial plan to go for. 

Car finance and personal loans are some of the most conventional borrowing options. While a car loan is tied explicitly to finance a new or used car, a buyer can use a personal loan on any other significant expense.

Before deciding on car finance or a personal loan, it's best to compare the market by looking at the distinct differences between the two. This will help you choose the best car loan method for you.

Car Finance Vs Personal Loan: What's The Difference?

A personal loan is an instalment loan where you make monthly payments over a set amount of time.  This type of financing is not specifically for a car and can be used for other needs. You can access these funds from a bank or financial institution, depending on your income and credit history. 

Personal loans are usually unsecured; therefore, you don't need to attach your vehicle as collateral as a buyer. Because of their unsecured nature, these loans attract higher interest rates and have a shorter repayment period than car finance.

On the other hand, car finance is specifically meant to finance the purchase of a vehicle. Once you take out this loan, you are expected to pay back the principal loan balance and interest over an agreed time.

The main difference between this type of loan and the personal loan is that your car acts as collateral. Once you fail to make instalment payments, the lender can choose to repossess your vehicle.

What To Consider Before Choosing A Finance Plan

Both car finance and personal loan require a commitment to regular payments. Apart from this, there are other aspects to consider before settling on one of them. 

Type of Car

Personal loans do not limit you on the type of car you can purchase. Once the loan is approved, you can go for the latest vehicle model with better technology, safety, and comfort features. This type of loan might be more suitable if you want to go for any car you want. 

Car finance can be limited to the models of car you need.  Since the vehicle serves as collateral, you may be tied down to one model until you can finish off payments. Also do consider that if you can't sustain the monthly payments, you may lose the car altogether.

Credit Score

It's best to review your credit score before applying for any loans. Banks and financial lenders perform thorough checks on your credit history before lending you any money, in order to limit defaults.

The higher your credit score, the lower your interest rate, or annual percentage rate (APR). If you score low in this area, it's better to apply for car finance because the car acts as collateral. 

Finance Situation

Your long-term financial plan is significant in determining if you select car finance or a personal loan. If you plan to invest in other financial-heavy projects such as buying a house, a personal loan is a much better choice. The personal loan does not use your car as collateral; therefore, it can't be repossessed. 

Loan Period

The tenure for each of these types of car loan financing is different. Personal loans are shorter and can have a time limit of between 1 to 5 years, while car financing can go from 3 to 8 years.

As you choose between car finance vs personal loan, check that you can afford the fixed monthly payments over the set amount of time. Furthermore, you should always check if the interest rate is variable or fixed. 

Pros Of A Personal Loan

No Collateral

Most personal loans are unsecured, making it easy to access cash. As long as your credit history is good, you can get a loan that does not put your car on the line. 

Easy Access To Cash

This type of financing can be arranged face to face, over the phone, or on the internet. Once your credit score checks out, you can receive the money within a few days to buy the car. 

No Limits

Unlike car financing, a personal loan does not tie you to spend the money on the vehicle.  You can decide to use part or all of it to get your car, as long as you can meet your monthly payments. 

Car Ownership

With a personal loan, you own the car while paying off the car. Since it's unsecured, the lender can't take back the vehicle. 

Cons Of A Personal Loan

High-Interest Rates

Because the loan is unsecured, the bank or financial institutions tend to charge higher interest rates. This high APR means that your monthly repayments can be enormous. 

Shorter Repayment Time

Compared to car finance, personal loans have a shorter repayment period, even within one year. 

Pros Of Car Finance

Cheaper Loans

Most lenders and dealerships give buyers a low-interest rate. The repayment period tends to be longer with low interest; therefore, your fixed repayments are lower. 

More Choices

You can opt for a straight Hire Purchase or HP, or you can look at PCPs - or Personal Contract Purchase. This option usually attracts a lower repayment. At the end of the repayment term, you can either return, trade-in for another, or pay the total amount to keep the car. 

Cons Of Car Finance

Secured Loan

With a car loan, your car is collateral. Once you can't make your monthly repayments, the lender can take back the car. 


With financing such a higher purchase, you don't own the car until you finish paying for the vehicle. 

Extra Fees

If you go for a PCP and plan to return the car at the end of the contract period, be aware that you will be charged extra for exceeding the agreed mileage limit and also any damage or wear and tear on the vehicle. 


Hopefully, now you feel a bit more confident about making your choice. You know now that your choice either to go with car finance or a personal loan should be carefully weighed up against your current and anticipated future financial circumstances.

You should consider factors such as your credit score, repayment period, and your overall budget. It's always best to compare the annual percentage rates (APR) from multiple lenders before settling on either of these loans.

So now you are armed with the information, good luck in your search to finally own your dream car! 👍

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