What’s a car loan?

Unless you go for car finance (which we'll come onto soon), there's not really such a thing as a car loan. Rather, you'd take out an unsecured personal loan that you choose to put towards the purchase of a new motor.

You can take out a loan for a car from a loan provider like Post Office, rather than the car retailer. We look at the differences between unsecured loans and car finance further down the page.

Such loans enable you to buy a car outright at the point of purchase and, instead of having ongoing debt with the car retailer, you will pay your loan provider back each month.

Loan providers will ask how much you want to borrow up to a certain amount. Using our loan calculator tool, you can enter the amount you want to borrow and roughly what your monthly repayments might be. This could cover all or some of the value of the car you want to buy.

When you get an unsecured loan (often called ‘personal loans’), you’ll be given an APR, which stands for “annual percentage rate”. This is how much on top of the loan amount you will need to pay back over the term of the loan.

The ‘representative APR’ advertised by lenders may differ to the ‘personal APR’ you’re offered when you make your loan application, as the latter depends on your personal circumstances and credit score. Our calculator works out your monthly repayments based on the representative APR rather than your personal APR. So your actual monthly repayments might be more than those shown on the calculator.

Difference between unsecured loans and car finance

  Unsecured loan Car finance
Lender Loan provider Car dealership
Immediate car ownership Yes No
Monthly repayments To lender To retailer


There are a few reasons why taking out a loan to buy a car is a more cost-effective option:

  • You will own the car outright once it is purchased

  • Your monthly repayments on the same amount of money could be lower with a loan than with car finance or, to look at it another way, the ultimate cost of the car might be lower

  • You may qualify for other product benefits with your loan provider

  • If you want to use car finance then you have to go through a dealer, rather than buying second-hand from a private seller

  • With car finance, you will need to pay a deposit upfront (usually 10%)

  • Car finance can be more favourable when buying new cars than when buying second-hand

  • If you opt for car finance with a dealership, there could  be mileage limits which restrict how much driving you can do

Car finance can have a few benefits. The type of car finance you get could be hire purchase (HP) or personal contract purchase (PCP), where you would only fully own the car once the final payment has been made.

These types of contract:

  • Usually have flexible terms – possibly as long as 60-month repayment schedules

  • Can let you service the car at the dealership

  • May allow you to trade in your car at the end of the contract and begin the process again with a new one

Ultimately, your decision can be made based on how flexible you want to be. With a personal loan, you are not limited to purchasing your car from a dealer, however you may like the benefits that come with going through a dealership. While it’s important to make sure that you can afford all of the monthly repayments before taking out a loan or getting finance, there are occasionally circumstances beyond your control that can impact your financial wellbeing. It’s worth finding out what options there are with both loan providers and car finance providers should you miss a payment or find yourself in financial difficulty.

Is a loan the right way to pay for my car?

Your personal circumstances and credit score will impact the APR you are offered and general terms of your loan. The same is true if you use car finance.

If you are thinking about taking out a loan, then it’s imperative to make sure you are able to make the regular monthly repayments. Not doing so can harm your credit score and create financial difficulties as well as your ability to borrow money in the future.

You should do as much research as you can to find the right loan for you, as well as weigh the options of car finance and cash buying (if you are in a position to do so). Buying a car by using cash (or savings) is likely to be the most cost-effective option as the overall cost of the car won’t be inflated by interest or APR. However, even if you can make the one-off purchase using savings, you may decide that so much money going out the door may leave you without enough put aside for a rainy day, and this is where loans or car finance might help.

Remember that, with an unsecured loan, you don’t have to choose one or the other. You could use a portion of your savings to cover some of the cost of a car and take out a loan for the remainder.

Check before you apply

A Fast Checker is a tool that lets you check whether you will be eligible for a loan before you apply. All you need to do is enter a few details and we’ll perform a “soft check” – a kind of credit check that doesn’t show on your credit file and can help you decide whether you will be accepted for a loan. Applying for a number of loans at any given time can have negative consequences for your credit file, so it’s a good idea to check your eligibility beforehand with Fast Checker.

How much can I get on a loan for a car?

Unsecured personal loans tend to be for low amounts relative to very large purchases (such as mortgages). As an illustration, Post Office Personal Loans can offer a maximum of £25,000 and a minimum of £1,000. Most second-hand cars and many new cars fall within this range.

Other options:


If you are comfortable with not owning a car, you can lease one. There will be pros and cons to this so it’s important to consider things like the kind of driving you will be doing (as damage to the car can incur penalties), the amount you need to drive (there may be mileage limits) and whether you will use the benefits that are included (servicing and maintenance are usually included in the monthly cost).