If you want to buy a car and you don’t have the cash, you will either need to use a car loan, personal loan or take out car finance. When you use car finance you will need to sign a contract with terms and rules, this will usually state a date you will need to pay the amount back by. The same thing will apply for a loan. However, there are a few differences between car loans and car finance, we will explain them here…

Car finance

There are a few main types of car finance, the main one being hire purchase (HP). If you don’t have much of a deposit and your credit rating isn’t as good as you’d hope, there are options such as car finance for bad credit and no guarantor you can look into. The HP car finance option enables you to pay off your car in fixed amounts plus interest every month then at the end of the agreement, you will own the car. Other options like car leasing and PCP don’t always enable you to keep the car at the end of the contract. If you lease a car, you give the keys back when you have finished paying the agreement and if you use PCP, you will still need to pay what the car is worth at the end of the agreement. 

Depending on how much money you have, car financing is a useful way to help you get a car. It will be down to you to decide on the type of car finance you would like to use. The more money you can put down as a deposit, the less your monthly paybacks will be or the shorter the payback term will be. 

Car loan

The other option is to take out a car loan, rather than car or personal finance to fund your next car. One of the main differences between car finance and a car loan is where the funds come from, likely through a bank; whereas finance is agreed with a dealership or a finance provider. You receive the loan amount in one payment, meaning you can use the loan to buy a car outright rather than in instalments. If you don’t have a good credit score, car finance would likely be cheaper than an unsecured loan. It’s also worth remembering car value decreases over time, so you might lose money over time if you’re taking out a loan. 

If you end up going for PCP car finance, you could face some limitations, such as a specific number of miles you can drive and other conditions. These kinds of rules don’t apply if you’re using a loan, you will be the one responsible for any car modifications and you are free to drive as many miles as you like.

Now you know the difference between car loans and car finance you will be able to decide if you need to use either in the future. It will all be down to you to decide on the most effective way to finance your new car. There are pros and cons of using both loans and finance, but most people don’t have cash upfront, so you are not alone.