Car Finance vs Loan: Understanding the Key Differences

If you need a new car but don’t have the cash to buy one outright, there are options available for you.

From a traditional bank loan to the various types of car finance, there are plenty of ways to fund your new set of wheels.

The question is, what is the difference between car finance and a loan, and what do terms like unsecured loan and monthly repayments mean? Don't worry, we've got you covered!

In this blog post, we'll break down the finance options available when buying a car.

Different Types of Car Finance and Loan Options

When you’re searching for car finance or loans, you’ll find a lot of different types available. With terms like HP, PCP, and PHP, it's easy to get confused.

Below, we’ll explore the different types of car finance available, and the loan options you might encounter when looking to buy a car.

Car Finance

The different types of car finance include HP, PCP, and PHP. Here’s a brief rundown of each option:

HP (Hire Purchase) - Think of this as a more traditional route. With HP, you'll make monthly repayments on your car. Once all the payments are made, the car is yours. No need to return it or make a final payment.

We offer HP finance to fit a range of circumstances. Learn how car finance with Carmoola works today.

PCP (Personal Contract Purchase): This one's a bit more flexible. With PCP, your monthly payments are usually lower because they're based on the car's depreciation (its drop in value over time).

At the end of the agreement, you have options: you can return the car, make a final payment (often called a balloon payment) to own it outright, or trade it in for a new car.

PHP (Personal Contract Hire): With PHP, you're basically renting the car. You pay monthly, but at the end of the term, you return the car.

There's no option to buy it at the end, making it ideal for those who aren’t looking for a long-term commitment.

Types of Loans:

There are two main types of car loans available including secured and unsecured loans. Here’s a brief overview of each option:

Secured Loan: This type of loan is secured against something of value, often the car itself. If you don't keep up with your monthly repayments, the lender can take the car back.

The benefit of a secured loan is that since the lender has a safety net, they may offer you a lower interest rate.

Unsecured Loan: This is a general loan, and it's not secured against your car or any other assets. As there's more risk for the lender, interest rates might be higher. However, the benefit is that your car won’t be taken away if you can't make repayments.

Car Finance Vs Personal Loan: Pros and Cons

It’s easy to think that all borrowing is the same. Various loans can be similar in many respects, but they also have their unique differences.

If you get a personal loan, you can use it for anything you like, including buying a car. However, if you apply for car finance, its sole purpose is to help you purchase a vehicle.

As both have their own set of advantages and disadvantages, you’ll need to weigh up each option. This will help you determine which is best for you.

To save you some time, here’s a breakdown of the pros and cons of car finance vs personal loans:

Car Finance

  • Designed specifically for purchasing a vehicle
  • Flexible options available
  • Potential for lower rates

Car finance is designed specifically for buying a car. This can make the entire process smoother, as lenders understand the ins and outs of car purchases.

With types of car finance like PCP, you have various options at the end of your term – whether it's returning the car, making a final payment to keep it, or even trading it in for a fresh model.

You have the potential to benefit from lower rates. For example, if you have a good credit score, car finance options like HP may offer competitive interest rates.

  • The car can be repossessed if payments aren’t met
  • Potential for higher overall costs
  • You may need to pay a lump sum to keep the car

With secured finance options like HP, if you don't keep up with monthly repayments, the lender can repossess the car.

Depending on the length of your finance term and the interest rate, you might end up paying more for the car than its cash price.

With options like PHP, even though you're making monthly payments, you won't own the car at the end unless you opt for a buyout.

Personal Loans

  • You will own the car outright from day one
  • Potential for lower repayments
  • No collateral (with unsecured loans)

When you buy a car using a personal loan, the vehicle is yours from the get-go. No waiting until the final payment.

If you opt for an unsecured loan, your vehicle isn’t at risk if you can't keep up with monthly repayments. 

If you choose a secured loan, you can benefit from lower monthly repayments. Even unsecured loans can work out cheaper than some finance options, depending on your circumstances.

  • Strict lending criteria
  • Potentially higher interest rates on unsecured loans
  • Can take longer to receive the cash you need

Although not always the case, personal loan lenders do tend to have stricter lending criteria than car finance lenders. So, you may have a harder time getting accepted; especially if you have a poor credit history (more about that later).

Unsecured loans typically have a higher interest rate than car finance options. As the lender doesn’t have any collateral, they increase the amount you need to pay.

Finally, with a personal loan you may need to wait longer to receive the funds than you would with car finance. So, if you need a new car urgently, car finance may be the better option.

Monthly Payments and Repayments in Car Finance and Loans

All types of car finance, including personal loans, require you to make monthly payments. These include the finance amount, alongside interest and optional extras.

You will make payments every month until you’ve paid off your loan.

The amount you pay every month depends on the purchase price of the car minus the amount you’ve paid for the down payment.

Other factors that influence the cost are the loan term and the annual percentage rate (APR).

The APR is a very useful tool for comparison when looking at different options. The interest rate can vary depending on your credit score, the loan term, and if you’re purchasing a new or a used car. 

If you miss a monthly payment, you may be charged for making a late payment. Always read the small print so you know all the costs involved.

When factoring in how much you can afford on your monthly repayments, don’t forget the costs that come with a car. These include the fuel, insurance, servicing, repairs, and car tax.

You can also calculate car finance payments before you apply to ensure the repayments you'll be making are affordable.

Understanding Unsecured Loans for Car Financing

With a personal loan, you can either get a secured or unsecured loan.

Unsecured loans do not require collateral but expect to pay higher interest. This type of personal loan also has stricter requirements and may only be available to borrowers with excellent credit scores. 

Secured personal loans have lower interest rates than unsecured loans. As your assets are used as collateral for the loan, the lender views you as a lower risk.

It is deemed, you're less likely to miss a repayment if there is a risk you will lose your car, house, or other valuable possessions.

When choosing between a secured or unsecured personal loan, assess your credit rating as early as possible. A good credit rating will snag you a much cheaper deal.

Car Financing with Carmoola: Your Hassle-Free Solution

If you’re looking for a hassle-free car finance solution, Carmoola can help! Our HP finance options are simple, convenient, and available whenever you need them.

Our entire process is carried out online, meaning no annoying phone calls or paperwork to fill in.

You can apply for car finance from Carmoola anytime, day or night thanks to our 24/7 service.

Once approved, you'll have a virtual card to buy the car you want from your chosen dealership.

With our pre-loaded virtual card, you can shop at approved dealerships and also contact us to verify a dealer, to ensure you get the best deals to spread the cost of your purchase. 

It's a whole new way of spreading the cost of your next car, and using the latest technology, it only takes a few minutes to apply.

It's all done in our app with just a few clicks and your driver's licence. No interviews or phone calls. Simple! 😃🚗❤️

Learn more about car finance:

FAQs About Car Finance Vs Loans

What are the Types of Car Finance Available in the UK?

The most common types of car finance include Hire Purchase (HP), Personal Contract Purchase (PCP) and Personal Contract Hire (PCH). With HP you pay off the car's value in monthly instalments and own it at the end.

PCP offers flexibility with monthly payments, based on the car's depreciation and multiple end-of-term options. PCH is essentially the long-term rental of the car.

How do Unsecured Loans Work for Buying a Car?

Unsecured loans are a type of personal loan not tied to any collateral, meaning they don't require you to put up your new car (or any other asset) as security.

When using an unsecured loan to buy a car, you borrow a sum of money from a bank or lender. You then repay that amount, plus interest, in monthly instalments.

Since there's no collateral, these loans might have higher interest rates, but your car isn't at risk if you fall behind on payments.

What Are the Monthly Repayments in Car Finance?

Monthly repayments in car finance refer to the regular amounts you pay to the lender as part of your finance agreement.

The exact amount depends on several factors. These include the total cost of the car, your initial deposit, the length of the finance agreement and the type of finance you choose.

To ensure you can afford the finance, it's essential to understand what the monthly repayments will be.

Car Finance Vs Loan: Which is Better for Buying a Car?

Whether finance or a loan is better for you, largely depends on your individual circumstances and preferences. Car finance, tailored specifically for vehicle purchases, can offer more structured and sometimes more flexible options. They come with potential benefits like lower monthly payments with PCP, or no long-term commitment with PHP.

Personal loans, on the other hand, give you immediate ownership and can be used with any car seller. However, they might come with higher interest rates, especially if unsecured.

What is the Final Payment in Car Finance?

The final payment, often associated with Personal Contract Purchase (PCP) finance, is a lump sum payment due at the end of the agreement. It only applies if you decide to purchase the car outright.

Sometimes called a balloon payment, this amount is calculated at the beginning of the agreement. It is based on the predicted residual value of the car at the end of the term.

If you choose not to make this payment, you can return the car, or trade it in for a new finance agreement.