Guide to car loans

Getting a car loan

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Buying a car is one of the most popular reasons people take out a loan. But if you are considering borrowing to fund your new set of wheels, make sure you find the best deal to suit your needs.

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Few people can afford to stump up the full cost of a new motor without needing to borrow money, but before choosing a loan, it’s important to know exactly what’s involved so that you keep a lid on costs. Here, we explain how car loans work, and take a look at some of the pros and cons…

What is a car loan?

A car loan, as the name suggests, is a loan you take out to pay for a car. You decide how much you need to borrow and over what term you want to pay it back. Most car loans run for around three to five years, but longer or shorter terms might be available. 

Interest rates are usually tiered depending on how much you want to borrow. As a general rule, rates are lower the greater the size of the loan, so if you are borrowing an amount that is just below the next tier up, it may actually be more cost-effective to borrow a bit more.

That said, don’t extend yourself too far – you should never borrow more than you can afford to repay.

Advantages and disadvantages of car loans?

The biggest advantage of taking out a car loan to pay for your motor is that once you’ve driven the car off the forecourt, you own it outright.

If, however you choose a hire purchase (HP) plan instead of a loan, you are effectively “hiring” the vehicle for the term of the agreement. You don’t own it until after the final payment has been made. That means if you run into financial difficulties, you cannot sell it to pay back what you owe. 

One of the big disadvantages of car loans, however, is that because cars depreciate in value so quickly, by the time you finish paying off what you owe, your car may be worth a fraction of the price you paid for it initially. So this option won’t suit those who like to regularly update their vehicles.

It’s also worth considering gap insurance – this will pay the difference between what you paid for the car and what you receive in an insurance pay-out in the event of an accident or if the car is stolen.

Remember also that a car loan won’t always be the cheapest way to buy a car. September and March, when the new number plate registrations are released, often see particularly attractive forecourt finance deals offered, so it’s worth checking what’s available.

Although monthly payments may be lower if you opt to repay your loan over a longer term, remember that you will end up paying much more interest overall.

Things to note when trying to get a car loan 

When you apply for a car loan, the better your credit rating the better the deal you are likely to get. It’s therefore a good idea to check your rating with one of the credit reference agencies such as Experian or Equifax before applying.

Although monthly payments may be lower if you opt to repay your loan over a longer term, remember that you will end up paying much more interest overall.

Another option is to take out a car finance arrangement at the dealership.

The lending criteria for finance generally isn't as strict as for a personal loan, but interest rates are often higher and there are certain conditions attached to the agreement.

For instance, the vehicle will be used as security against the loan and you won't actually own it until the last payment is made. In some cases, you'll never actually own the vehicle and will have to hand it back once the finance arrangement is finished.

Find the right car loan for you

There are lots of different car loans to choose from, so it pays to do plenty of research before picking one. Remember to look at other car finance options too, so you can make sure you are getting the best deal to suit your needs.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

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