Personal Car Loans
Another option to financing a vehicle is a personal loan. It is one of the cheapest ways to buy a car especially as interest rates are currently still very low but it doesn’t mean it’s the right way for you to buy.
Personal loans and is it right you?
When purchasing a new or used car, in most cases you need to borrow the money and ideally you want to own the car at the end of the deal. There are two main options of the finance you can get.
This is either hire purchase or a personal loan. The personal loan option is popular choice a many people like to secure funding prior to visiting the dealer which negates having to sit through hours of negotiations with the dealer and their finance options. This also means you can shop around for the best interest rate on the market.
A bank or lender that has an agreed term to payback what’s owed offers this type of loan. You will pay interest on this loan so shopping around for a good deal is imperative.
Unlike other types of car finance an unsecured personal loan doesn’t use the car as security so should there be a default on a payment or if the car is written off and the insurance doesn’t cover the total value of what’s left to pay you will have to find the difference.
Personal loans require good credit history so lenders are confident they can recover the funds if needs be. On the plus side once the deal is fully paid up you own the vehicle outright and then have the asset for a deposit for another vehicle in the future.
A point to remember here is that cars depreciate quickly so the longer you have a vehicle and the more mileage is accrued then the less the vehicle will be worth.
I’ve found the car what next?
Once you’ve found a car you want to buy you know the purchase price (don’t forget to negotiate) minus the deposit you can put down which leaves the amount you will need to borrow.
So with the car loan you borrow a fixed sum, which is repaid in monthly instalments over an agreed period of time. A point to note here is that the shorter the term the higher the interest rate. You will see the interest rate come down the longer you take the loan out for. Lenders have an interesting way of terming their loans as ‘representative’ which in turn means they offer a rate on the advertising for a specific loan but can very easily change this on a individuals circumstances.
An example of this is,
Let’s take an example…
Say you're buying a car priced at £16,000:
- Deposit = 10% = £1,600
- Left to pay = £14,400
Good news, you are accepted for a car loan and borrow £14,400 over three years.
- You secure a loan with a 3.3% APR
- Monthly Payments = £420.36 over 3 years
- Total amount payable = £15,132.96
With a low interest rate of 3.3% in the above example you would pay £732.96 over the life of the loan
A good tip is to try to pay some of the deposit on a credit card as this means it can be a lot easier to sort out any issues with the car further down the line. Paying on a credit card means the credit card provider is jointly liable with the car dealer should anything go wrong.
The end of the loan
Quite simply once the loan is complete and paid in full you will have nothing left to pay and the loan is settled.
Will a personal loan suit you?
Below are the main pros and cons of choosing a personal car loan. Only you can ensure which loan option is going to work.
- It's simple to arrange and understand.
- The term is flexible
- You own the car outright as soon as the cash is transferred to the dealer
- Being a cash buyer gives you more leverage to negotiate the price.
- Personal loan rates (in most cases) tend to be cheaper than dealer finance.
- You need an excellent credit score to obtain a personal loan.
- Monthly payments are higher than for some other forms of car finance as it’s a direct repayment. (PCP’s have cash balloons, which reduce the borrowing amount)
- The manufacturer won’t contribute because you are not taking their finance option.
- Depreciation will mean the value of the vehicle is a lot less when you come to sell it
- As the car is yours you are responsible for all repairs and running costs.