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Choosing between a car loan and a personal loan can be tricky because they’re both suitable options with different pros and cons. Things are complicated further by the multiple types of car loans that exist.
In order to come to the most sensible decision, the trick is asking yourself the right questions. Luckily, we can help with that.
Warning: late repayments can cause you serious money problems. See our debt help guides.
While a personal loan is a pretty straightforward financial product (you borrow money, you pay it back with interest in an agreed number of monthly instalments, and that’s pretty much it), car loans are a bit more complicated. We’ve tried to nail down the main differences between these two.
There are essentially two types of car finance: you can purchase your car on personal contract purchase (PCP), which entails borrowing less money and making lower monthly payments but also making a pretty substantial balloon payment at the end, or on hire purchase (HP). With HP, you pay an initial deposit and then borrow the remaining value of the car, which you’ll pay back in instalments.
Despite some pretty substantial differences, about which you can learn more on our car finance page, HP and PCP share some basic features:
With a personal loan, you’ll borrow all or part of the value of the car and pay it back monthly. The conditions will depend on your individual circumstances, but the loan will usually have the following features:
Try asking yourself the following questions:
A personal loan grants you more flexibility and allows you to own the car the moment you purchase it. However, it’ll only be cheaper if you have good credit, don’t borrow too much and can afford fairly costly monthly payments.
On the other hand, buying on PCP can be sensible if you’re not sure you want to keep the car in the end and want to keep the monthly repayments as low as possible. Finally, HP deals are a sort of middle ground between the two.
A good way of going around it is budgeting how much you want your monthly payments to be, and then working your way back to figure out which finance option will offer the best deal with that amount.
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