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Is Car Finance The Same As A Loan?

You want that nice shiny car you've just seen 🚘 but confused by all the car finance jargon? 😧 If so read on...  A big challenge in buying a car is getting the finances for the venture. Not so many people can afford to pay the total amount of the car upfront. Because of this, numerous financial tools allow buyers to get a new or used vehicle and pay some affordable fixed costs monthly. 

With all these different financial plans and terminologies, a buyer needs to understand whether car finance is the same thing a getting a loan. Financing a car means that you borrow an amount of money either via a dealer or from a bank, and then you will repay that sum, usually plus interest, over a period of time. Car finance is similar to a loan in that you have to pay back the amount you borrowed, plus interest, but depending on the type of finance deal,  there can also be other fees.

The two also differ in some ways. Let’s take a look at some of the similarities and differences between a loan and car finance.

What Are The Similarities?

Interest Rates

This rate is the amount you need to pay on top of the monthly repayments, it's based on the amount you borrowed, the term over which you borrow, and your credit rating. You pay this to the lender for the privilege of borrowing the money. The annual percentage rate (APR) is a good figure to get and this will reflect the basic rate charged overtime to the borrower. This is useful for comparing like for like with different lenders. 

If you are getting finance from a car dealership via Hire Purchase, or a personal loan from the bank, you have to be charged interest rates. This fee differs between financial lenders; therefore, it's advisable to compare offers from different people. 

Sometimes, if you are looking for a brand new car, some dealerships might occasionally offer zero interest rate loans - this is used as an incentive to buy a particular model for example. You will also need a good credit rating to be approved. 

Terms and Conditions

Car finance options come with regulations to govern the loan repayment process. Buyers need to understand the loan term over which the sum is borrowed, the fixed monthly repayment amount, the interest rate, and in some cases maintenance requirements, or extra fees/conditions etc.

Whether you take up the Personal Contract Purchase, Hire Purchase, Leasing, or a Personal Loan, these critical details are essential to ensure you repay the loan without any issues and fully understand your obligations.

Loan Costs

The key components of car finance repayments are the principal amount and interest. These consist of the initial amount loaned plus the costs paid to the lender over the loan period. Also, if you are considering a PCP, your loan may also come with extra expenses due at the end, such as the final "balloon" payment (which you have to pay in order to keep the car) or charges of excess mileage or damage to the vehicle. Make sure you understand all these if you are considering a PCP.

Credit History

If you plan to get a loan or finance for your car, lenders have to examine your credit score. An excellent rating shows that you are reliable and can pay back the loan. Lenders use the credit rating to determine your level of financial responsibility and discipline. A good score can help you secure a low-interest rate.

Before actually applying for the finance, contact one of the credit reference agencies such as Experian to check your records to ensure they are all in order and correct and your score is good. Take steps to correct any errors at this stage. Small inconsistencies can easily have a negative impact on your score.

Banks are more stringent when it comes to credit history and will need an excellent rating to lend you money. However, dealers can lend you money even if your record is not that perfect. 

Spend flexibility

If you are getting a personal loan or independent finance for your car, you can use the cash to buy any new or used vehicle. There is flexibility in how you can use the loan amount. And you can choose if you wish to also put down a deposit or not. A personal loan gives you more options to get the car of your dreams, and the freedom to negotiate, with the cash provided by your lender. 

What Are The Differences?


Car finance options such as hire purchase and personal contract purchase require a down payment. So when getting a loan from your lender, you will need to make an initial deposit. Depending on the type of agreement, the deposit can be from 10% and above.

If you make a huge downpayment, you can borrow a lower amount. But with personal loans, there is no deposit required to receive the money. As long as your credit score is perfect, you are good to go.

Repayment Method

For car finance plans such as personal contract purchase (PCP), you make monthly repayments each month and have a final balloon payment at the end of the contract term. You do not own the car until this is done. Because of this, the monthly repayments will be lower than a personal loan, as you are only covering the depreciation of the vehicle.

This type of dealership financing allows you to make payments according to how you would like to use the car, consider whether you might wish to keep it at the end. You can choose to return the car at the end and not make the final payment. Or you can trade it in. 

In the case of a personal loan, the vehicle belongs to you entirely from day one as the car is not used as part of the deal. 


Finance deals or personal loans are usually unsecured. This allows the buyer to repay the car loan without tying down another asset for it. Due to this, the interest rates are generally higher as the loan is at high risk.

Car finance is different from a loan because the car acts as collateral for the money borrowed. Once you default on payments or delay, the lender can repossess the vehicle, which serves as security.

Contract Length

Dealership financing offers shorter loan periods between 1 to 5 years. This period means that you will pay higher monthly payments and lower interest in the long run.

However, financial institutions and banks can give you up to 7 years. This extended contract directly translates to lower monthly payments. Because of this longer contract term, the interest rates will ultimately be higher overall.

Learn More From The Best

Really, car finance is not very different from a loan. Both financial plans lend money and charge interest in order to give buyers options to get their dream car without having to save up first. 

But before committing to any agreement, you need to understand the different terms and conditions that come with each option.

You could apply for car finance from Carmoola today! Once approved, you'll have a virtual card to buy the car you want. With our pre-loaded virtual card, you can shop for you car almost anywhere and 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! 😃🚗❤️

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