Car Loans

We’ll walk you through what a car loan is, the alternatives and the pros and cons of using one to finance your next car

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Zuto is a credit broker, not a lender. Our rates start from 8.9% APR. The rate you are offered will depend on your individual circumstances. Representative Example: Borrowing £8,000 over 48 months with a representative APR of 21.2% the amount payable would be £241 a month, with a total cost of credit of £3,559 and a total amount payable of £11,559.

Table of contents

Written by Andrew Freelander
Read time: ~5 mins
Published: 16th November 2023

What is a car loan?

A car loan provides a way to buy a car when you don't have the cash upfront.

By borrowing money and paying it back with interest, a car loan allows you to spread the cost of the vehicle and budget for your monthly repayments over a set period.

Car loans are ideal if you want to own your car outright from day one.

How do car loans work?

One of the simplest ways to finance a vehicle is to use a car loan.

A car loan works like other loans - you borrow an agreed sum with a fixed interest rate and repay monthly.

There’s no deposit to pay; you borrow what you need to buy the car and pay it back over a set period. You can control how long you’d like to repay the loan, but the longer you take, the more interest you’ll be charged.

This type of loan is available from car loan companies, online loan providers, banks and credit unions.

Unlike car finance, when you buy a car with a loan, you’ll own it straight away rather than initially 'hiring' it. This arrangement allows you to pay off the loan early and sell the car whenever you want.

There are two types of car loans to consider:

Personal car loan

Personal loans are also known as unsecured loans because the loan isn't borrowed against an asset, such as your home. It's the most common type of car loan.

It's the simplest way to finance your car because you can apply for a car loan online, and if your car loan application is successful, you may have the money in your account within 24 hours.

Personal car loans are ideal if you have a good credit rating and a regular income. You can typically borrow up to £25,000 and pay what you’ve borrowed back over one to seven years with interest.

Secured car loan

This is a loan secured against your home or a property you own. Your home equity is used as collateral, which means that if you can't repay what you owe, the value of your property is used to settle the loan.

This type of loan is a more significant commitment and comes with risks; however, if you require a large sum of money or have a poor credit rating, it could be an option worth considering.

Secured car loans are more suited to loans over £25,000 with repayment terms of up to 25 years.


How much do car loans cost?

A car loan can be one of the cheapest ways to finance a car, and many car loan providers are competing to offer the best car loans.

The cost of your car loan will depend on the following:

  • cost of your car (or how much you need to borrow)
  • car loan APR (the interest rate you are offered)
  • borrowing term (typically between one and seven years)

To find the best car loan deals, use a comparison website or loan broker and compare the car loan APR for the lowest interest rate.

What is the difference between a car loan and car finance?

Whether you buy a new or used vehicle, there are several ways you can pay for your car if you cannot afford to pay for it upfront.

The most significant difference with a car loan is that you own the car immediately rather than leasing it until the final payment.

Most car finance options will need an initial deposit; you'll then make monthly instalments over an agreed period and typically complete the purchase with a final, sometimes larger payment.

Personal Contract Purchase (PCP)

A personal contract plan offers a way to hire a vehicle for a set period, after which you can decide to buy or return it.

A PCP requires a deposit, usually between 10% and 35% of the full value of the vehicle, and monthly payments over a set term to cover a portion of the car’s value.

If you decide to buy the car, you'll pay a final lump sum - often described as the balloon payment.

Hire Purchase (HP)

With a hire purchase agreement, you lease the vehicle from the finance company during the term and become the owner when the agreement ends.

You must make regular repayments over the term (up to five years) to cover the purchase price. You'll usually pay the deposit upfront, and a maintenance or service fee may also be added to the monthly cost.

Am I eligible for a car loan?

You must meet the car loan provider or bank's lending criteria to get a car loan. Each lender will have different loan eligibility requirements, but to qualify for a car loan, you'll usually need to:

  • Be a UK resident
  • 18 years or over
  • Have a regular income
  • Have a bank account

The lender will perform a credit check to confirm your creditworthiness, which may appear on your credit record, which other lenders can see.

Can I get a car loan with bad credit?

, a car loan is possible with bad credit, but getting approval will be more complicated, and your loan may cost you more. Here are some of the things you can do to increase your chances of getting bad credit car finance:
  • Get a free credit report and check that the information is up-to-date and accurate. Find out what's impacting your score and take steps to fix any problems, e.g. are you registered on the electoral roll? If not, register to vote with your local council because doing so helps prove where you live.
  • Are you using too much of your credit card limit? If so, try to keep your credit card balances under 25% of your limit. Or perhaps your credit score is low because you’ve not used a credit product before - if so, consider applying for a credit building credit card to build your credit score.

  • Use a comparison site with an eligibility calculator to show you the lenders most likely to approve you for a car loan.
  • Don't apply for multiple car loans within six months because you'll get credit checked each time. Too many hard credit searches will damage your credit report and make future borrowing more challenging.

What are the pros and cons of a car loan?

Most online lenders and banks offer personal car loans, so finding loans to buy a car is simple. Shopping around for a cheap car loan is easier because you're not tied to a dealership.

Here are the main advantages and disadvantages of choosing a car loan to finance your car:

  • No deposit required
  • Own the car outright instantly
  • Sell the vehicle whenever you wish
  • Repay your loan early
  • No mileage restrictions
  • You'll need a good credit rating
  • Interests rates could be higher if you have bad credit
  • Your home is at risk if you default if you choose a secured loan
  • Age restrictions may apply to the car

Are there any alternatives to car loan?

Car finance:

Car dealerships often provide car finance - they may call it a personal contract purchase (PCP), and it is a popular way of financing a vehicle. You typically need to put down a deposit and repay the remainder over an agreed term. You can make a final payment or return the car at the end of the contract.


Also known as Personal Contract Hire (PCH), this arrangement allows you to hire a new car for a set number of years and return it at the end of the lease period. You will not own the vehicle, so it’s like a long-term car rental.

Guarantor car loans:

Guarantor car finance is a type of car loan where someone (usually a close friend or family member) guarantees that the loan repayments are covered if you can't make your repayments. Both parties will need to have affordability and credit checks performed.

Credit card:

If you only intend to use your credit card for part payment, this can be a decent option if you use a 0% interest purchase card and pay off the balance within the interest-free period. Remember that the interest rates will likely be much higher than a car loan once the 0% interest period ends.

Car loan FAQs

Can I repay a car loan early?

It depends on the terms and conditions of the loan. Some cheap car loans may advertise a low-interest rate but will charge a fee for early repayment or late or missed payments.

If you think there's a possibility you'll want to pay off your loan early, look for loans with flexible repayment terms.

The quicker you can repay the loan, the less interest you'll pay, so if you can't get a car loan with flexible repayments, check the terms and conditions carefully for early repayment charges.

Can I get a car loan for a used car?

A car loan allows you to buy a new or used car. Car loan providers and banks aren't concerned about the type of vehicle you purchase or its condition; they want to ensure you're creditworthy and can afford the monthly repayments.

Can I refinance my car loan?

If you need to reduce your monthly repayments, it's possible to refinance your car loan. You can either find a loan with a lower interest rate, use a 0% credit card, pay your existing loan off with a lump sum, or negotiate with your lender to extend the term - which would make your monthly repayments smaller but increase the total cost of the loan.

Are car loans secured or unsecured?

Car loans are typically unsecured and known as personal car loans; however, if you need to buy a high value vehicle or struggle to be approved for credit, secured car loans may be available if you own a property.

Will a car loan affect my credit score?

Yes, any credit product will affect your credit score. When you apply for new credit, your score may temporarily decrease once you have been hard credit checked, but your credit score will improve as long as you repay on time and in full.

If however, you’re late repaying or miss a payment, your credit score will be negatively impacted.

Written by
Andrew Freelander
Take Control Author at Choose Wisely

Andrew joined Choose Wisely 5 years ago, originally working in a design capacity to make sure the website was simple to use. Most notably he worked with the Consumer Finance Association to design the comparison table of choice for High-Cost Short Term Finance products.

Important Information.

All of the information in this guide is correct at the time of writing.

If you complete a loan search application on the Choose Wisely website, the rates shown may vary based on your personal circumstances, are subject to status and are available to those aged 18 and over. Rates available range from a minimum of 13.9%APR to a maximum of 1721%APR Representative and loan repayment periods range from 3 to 60 months.

If you need financial advice you can visit stepchange, speak to citizens advice, call the national debtline or speak to

If you've been declined, please refer to your credit report to gain an understanding of why before making further applications.
You can access your credit report for free from Credit Karma, Clearscore or Experian.

Warning: Late repayment can cause you serious money problems. For help, go to