Car loan FAQs

Car loans have long been a way of finding the funds to buy a new or used car.

But car loans are only one type of car finance, and there are many alternatives to this more traditional way of borrowing the money to buy your car. Over 91% of all new private car registrations in the UK are financed by members of the Finance and Leasing Association (FLA).

The frequently asked questions we receive about car loans may help you decide which of the alternatives you might want to explore when buying your next new or used car.

How do I get a car loan?

Typically, car loans are personal loans, most often granted by a bank or other lending institution (such as your building society).

There is usually a form to fill in, and this represents your formal application, which is considered by the lender. An article in Auto Express on the 12th of February 2019 warns that, if your application is eventually approved, it may take a while for the funds to finally clear.

Is the loan secured or unsecured?

Car loans from your bank or other lender are usually unsecured – if you fail to make the repayments on the personal loan, there is no risk of the car being repossessed, but your credit rating, of course, is going to take a significant hit because of your defaulting on the payments and you are likely to find it difficult to raise further loans or credit in the future.

Once you have your application for the loan approved, the money is in your pocket, and you buy your chosen new or used car, the vehicle is yours – you take full ownership of it from the word go.

How much interest do I pay?

The amount of interest paid on car loans depends on the amount you are borrowing, the repayment period (typically one to five years), and your personal credit rating – you are unlikely to raise a personal loan from your bank with anything less than an excellent credit rating.

In a posting dated the 1st of July 2018, the Money Saving Expert made the point that the headline rates for many personal loans may make them appear attractively priced. However, the rates of interest quoted by your bank or other lender are likely to be “representative” annual percentage rates (APRs) only, so although this is the rate of interest which 51% of borrowers are likely to pay, the remaining 49% may be paying rather more.

Are there alternatives to a personal loan?

There are several alternatives which serve a very similar purpose to car loans:

Hire purchase

  • hire purchase, for example, spreads the repayment over equal monthly instalments for a period similar to that of a personal loan;
  • in this case, however, the loan is effectively secured against the vehicle itself – if you default on the hire purchase instalments, the car may be repossessed, and its ownership does not transfer to you until the final payment has been made;
  • a hire purchase agreement, though, may be faster to arrange than a personal loan;

Lease purchase

  • lease purchase finance also involves a conditional purchase in that you are leasing the vehicle throughout an agreed term before making a final balloon payment when ownership is finally transferred to you;

Personal Contract Purchase (PCP)

  • this is very similar to lease purchase, but for the fact that, at the end of the contract, you have the choice simply to stop leasing the vehicle and hand it back to the finance company, or to make a final payment (of its Guaranteed Minimum Future Value) and take full ownership of the car.

How do I choose?

You might want to consult a specialist provider  – such as ourselves at Forza Finance –  experienced in arranging all forms of car finance to decide the course of action which might be suitable for you.