Car loans: how a personal car loan differs from dealer finance

Car finance vs personal loan: the four differences that matter

1. Ownership, from day one or at the end. A loan is paid into your account and you buy the car outright, so it is yours immediately and you can sell it whenever you like. Under hire purchase or a PCP the lender holds title until the final payment, which is why selling means settling first.
2. The rate is priced on you, not on the car. Unsecured lending has no asset behind it, so the rate follows your credit file more sharply. A strong file often beats dealer rates on a used car; a weak one usually does not, and a motor lender with the car as security may lend where a personal lender will not.
3. You lose section 75, and that is a real loss. Where a car is bought with linked credit, section 75 of the Consumer Credit Act 1974 can make the lender jointly liable with the dealer for misrepresentation or breach of contract. A personal loan paid to you is not linked credit in the same way, so the claim you would have had against a finance house is gone.
4. And you lose voluntary termination. The right to hand the car back once half the total price is paid belongs to regulated hire purchase and conditional sale agreements. A personal loan has no such exit: the debt stands whatever happens to the car, which is the flipside of owning it outright.

Common questions

Is car finance a secured loan?

Hire purchase and PCP are not secured loans in the mortgage sense, but they are asset-backed: the lender owns the car. A personal loan is unsecured, and a logbook loan is a different and far more expensive thing again.

How do I compare car loans against dealer finance on cost?

On a new car with manufacturer support, dealer finance usually wins. On a used car bought privately, a personal loan usually does. Compare the total amount payable, not the rate, because the term differs.

Does a car loan need a deposit?

No. You borrow what you need, and the deposit question becomes how much of the price you fund yourself. The arithmetic is the same: less borrowed means less interest.

Can I get a car loan with a poor credit file?

It is harder than motor finance, because there is no car behind the debt. Where an unsecured lender declines, a hire purchase agreement on the same car is often approved.

What decides the car loan interest rate I am offered?

Your credit file, more sharply than on motor finance. An unsecured loan has no car behind it, so the rate follows your file: a strong one often beats dealer rates on a used car, and a weak one usually does not, which is when a motor lender with the car as security may lend where a personal lender will not.

Cheap car loan rates: where is the cheapest borrowing?

It depends which side of the credit file you are on. Unsecured lending has no asset behind it, so the rate follows your file more sharply: a strong file often beats dealer rates on a used car, and a weak one usually does not. A motor lender holding the car as security may lend where a personal lender will not, so compare the total amount payable on both rather than the headline rate on either.

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