Car Finance vs Personal Loan – What’s the Best Way to Fund Your Car?

If you’re planning to buy a car and don’t want to pay the full amount upfront, you’ve probably come across two main options: car finance or a personal loan.

At first glance, both seem to do the same thing. You borrow money, you make monthly payments, and you drive away with a car. But the way they work, and what they cost you over time, can be quite different.

Let’s look at both options, and why car finance is often the better fit for most people.

What Is a Personal Loan?

A personal loan is money you borrow from a bank or lender. You get a lump sum, agree to pay it back over a set number of years, and the money is yours to spend however you like.

So if you’re using it to buy a car, you’ll usually pay the full price upfront. From day one, the car belongs to you. You’re the registered owner, and you take on the full risk of depreciation.

Personal loans often come with fixed interest rates and monthly repayments. They’re usually unsecured, which means they’re based on your credit score and general financial history rather than being tied to the car itself.

It’s a clean, simple loan. But it’s not designed with car buying in mind.

What Is Car Finance?

Car finance is a bit more specific. It’s built around helping people buy a car.

There are a few types, but the two most common in the UK are:

• Hire Purchase (HP): You pay monthly, and once the final payment is made, the car is yours.

• Personal Contract Purchase (PCP): Lower monthly payments, with a choice at the end to buy the car, trade it in, or return it.

Unlike personal loans, car finance is usually secured against the vehicle. That means the finance company owns the car until you’ve either paid it off or made a final payment to keep it. If things go wrong, they can take the car back, but that also means they’re more willing to work with a wider range of credit profiles.

Comparing the Two – What’s the Difference?

Here’s how car finance and personal loans compare in the real world:

Monthly payments:
Car finance, especially PCP, tends to have lower monthly payments. That’s because you’re not always paying off the full value of the car. With a personal loan, you usually are.

Deposits:
Some personal loans let you borrow 100% of the car’s price. Car finance sometimes needs a deposit, though many no-deposit deals are available if you know where to look.

Ownership:
With a personal loan, you own the car outright from day one. That’s a plus, but also means the value starts dropping from the moment you drive away. With car finance, ownership comes later (or is optional), so you’re not stuck with the full depreciation hit unless you choose to be.

Credit impact and approval:
Personal loans can be strict. If your credit score isn’t strong, you might not get the rate you want, or get approved at all. Car finance lenders tend to be more flexible, partly because the loan is tied to the car.

Flexibility at the end:
This is a big one. Car finance, especially PCP, gives you options. Want to keep the car? Pay the final amount. Fancy a change? Hand it back or trade it in. With a personal loan, you’re locked in, for better or worse.

Why Car Finance Often Makes More Sense

Car finance is built around buying a car. It’s not a generic loan, it’s designed to work with how cars lose value, how people change vehicles every few years, and how much most of us can realistically afford to pay each month.

You also don’t have to tie up a chunk of your personal credit line on a depreciating asset. Car finance keeps that separate.

It usually gives you more breathing room in your budget too. Lower payments mean more flexibility month to month. And if your situation changes, you’ve got more options.

In short: it’s a more car-friendly way to buy a car.

When a Personal Loan Might Work Better

It’s not all one-sided. A personal loan might suit you better if:

• You’re buying an older car that finance companies won’t touch

• You’ve got excellent credit and can get a very low interest rate

• You’re set on owning the car immediately and plan to keep it for a long time

But for most people, especially if you want a newer car and a bit of financial wiggle room, car finance is the smarter option.

Both personal loans and car finance can get you behind the wheel. But only one is built with cars in mind.

If you’re looking for lower payments, more flexibility, and a finance option that fits how people actually buy and use cars, car finance is probably the way to go.

At Motorly, we help people compare their options and apply with no hassle. You can check your eligibility online, see what deals are available, and take it from there.

No stress. No big upfront decisions. Just a car finance option that makes sense for you.