Car Finance vs Bank Loan. Which Is Better When Buying a Used Car?

If you don’t want to pay for the vehicle entirely from savings, two common options are taking out a personal bank loan or arranging vehicle finance such as Hire Purchase (HP) or Personal Contract Purchase (PCP).

At first glance, comparing the interest rate or monthly payment might seem like the obvious way to decide. However, there are other important differences worth considering, including ownership, flexibility, consumer protection and what happens if your circumstances change.

At Redgate Lodge, we believe customers should understand their options before making a decision. This guide explains some of the key differences.

What’s the Difference Between Car Finance and a Bank Loan?

With a personal bank loan, you borrow money from a bank or other lender and use that money to purchase the vehicle. You then repay the loan separately.

The car is normally yours from the point of purchase, while your agreement with the bank exists independently of the vehicle.

With vehicle finance, the finance agreement is directly connected with the vehicle.

Depending on the product selected, you make regular monthly payments over an agreed period, with the finance company retaining an interest in or ownership of the vehicle until certain conditions of the agreement have been satisfied.

This difference can be more important than many motorists realise.

Hire Purchase (HP)

Hire Purchase is one of the simplest and most established ways of financing a vehicle.

You normally pay an initial deposit followed by fixed monthly payments over an agreed period.

Once all payments and any applicable purchase fee have been made, ownership of the vehicle passes to you.

Why choose HP?

HP can be attractive to customers who:

• Want predictable monthly payments
• Intend to keep their vehicle
• Don’t want a large optional final payment
• Want vehicle specific consumer protections that may apply to regulated finance
• Prefer to keep some of their savings rather than purchasing the vehicle outright

The interest rate and total amount payable should always be considered before entering into an agreement.

Personal Contract Purchase (PCP)

PCP works differently from traditional Hire Purchase.

Part of the vehicle’s value is deferred until the end of the agreement as an Optional Final Payment, sometimes referred to as a balloon payment.

Because you’re not repaying the entire amount during the regular monthly payment period, PCP can potentially provide lower monthly payments than an equivalent HP agreement.

At the end of a typical PCP agreement, subject to its terms, you may have several choices:

Keep the car – pay the Optional Final Payment and any applicable fees.

Change the car – depending upon the vehicle’s value and settlement figure, it may be possible to use any available equity towards another vehicle.

Return the car – subject to the agreement’s mileage, condition and other contractual requirements.

PCP isn’t automatically the right choice for everyone, but the flexibility can make it attractive to motorists who like changing their vehicle regularly.

Personal Bank Loan

A personal loan can also be an effective way of purchasing a car.

You borrow the required amount independently and then purchase the vehicle using those funds.

One potential advantage is simplicity: you own the vehicle outright and simply repay your bank or loan.

However, it’s important to compare more than just the advertised APR.

A personal bank loan and vehicle finance are structured differently and may provide different rights and protections.

Is Car Finance More Expensive Than a Bank Loan?

Not necessarily.

The only accurate way to know is to compare the individual quotations available to you.

When comparing them, don’t simply look at the monthly payment.

Consider:

Deposit + monthly payments + fees + any final payment = Total Amount Payable

Also consider the APR, length of the agreement and any conditions attached to it.

A bank loan showing a lower monthly payment could simply be running for longer.

Likewise, a PCP payment can appear significantly lower because a proportion of the vehicle’s value has been deferred into the Optional Final Payment.

Comparing like for like is important.

Does Car Finance Give You Additional Consumer Protection?

This is an important area that is sometimes overlooked.

Certain regulated vehicle finance agreements can give consumers protections under the Consumer Credit Act 1974.

Depending on the type and circumstances of the agreement, the finance provider may have responsibilities relating to the transaction in addition to the customer’s rights against the vehicle retailer.

For example, Section 75 of the Consumer Credit Act can provide protection for qualifying debtor creditor supplier arrangements where the necessary legal requirements are satisfied.

This is different from simply borrowing money independently through a personal loan and then purchasing a vehicle.

Your statutory rights when purchasing a vehicle from a motor retailer are not replaced by taking finance. Vehicle purchases from a trader remain subject to applicable consumer legislation, including the Consumer Rights Act 2015.

What Is Voluntary Termination?

Another feature of many regulated HP and PCP agreements is a statutory right known as Voluntary Termination.

Under Section 99 of the Consumer Credit Act 1974, qualifying customers may have the right to terminate their agreement early.

Broadly, liability can be limited to 50% of the Total Amount Payable, together with certain other amounts that may be due under the agreement.

If you have already paid at least the required amount, you may potentially return the vehicle without having to make all the remaining scheduled payments.

If you haven’t yet reached the required amount, it may be possible to pay the difference.

There are important conditions and responsibilities involved, including taking reasonable care of the vehicle, so customers should always check their individual agreement and speak with their finance provider before making a decision.

A conventional unsecured bank loan does not normally provide an equivalent right to simply return the vehicle and terminate the loan.

What Happens If You Want to Settle Car Finance Early?

Customers don’t necessarily have to keep their vehicle finance for the full original term.

Regulated finance agreements generally provide rights relating to early settlement.

You can request a settlement figure from the lender showing how much is required to repay the agreement early.

Depending upon the agreement, settling early may reduce the amount of future interest that would otherwise have been payable.

Always obtain an up to date settlement quotation directly from your lender before selling or changing a vehicle subject to finance.

Finance Can Help You Keep Your Savings Available

There’s another consideration that has nothing to do with the interest rate.

Liquidity.

Imagine you’re buying a £30,000 vehicle and have £30,000 sitting in savings.

You could use the entire £30,000 to purchase the vehicle.

Alternatively, you could potentially put down a deposit and finance the remaining balance.

Although financing involves borrowing costs, it means you haven’t committed all of your available cash to a depreciating asset.

Keeping accessible savings may be important for emergencies, home improvements, business requirements or simply maintaining a financial safety net.

Whether that’s worthwhile depends entirely upon your individual financial circumstances.

Example: Buying a £25,000 Used Car

Consider a customer purchasing a vehicle for £25,000.

They could potentially:

Option 1 – Pay Cash

Pay £25,000 from savings and own the vehicle immediately.

Option 2 – Personal Bank Loan

Borrow some or all of the £25,000 independently, purchase the vehicle outright and make monthly repayments to the bank.

Option 3 – Hire Purchase

Pay a deposit and finance the remaining balance through an HP agreement, making agreed monthly payments until ownership eventually passes to them.

Option 4 – PCP

Pay a deposit, make monthly payments and defer part of the vehicle’s value until the end of the agreement as an Optional Final Payment.

There isn’t one option that’s automatically best.

The right choice depends upon your budget, available savings, expected ownership period, annual mileage, credit profile and what you intend to do with the vehicle in the future.

Bank Loan vs HP vs PCP – Quick Comparison

Exact terms, rights and conditions depend upon the individual finance agreement.

Is It Better to Finance a Car or Get a Bank Loan?

There’s no universal answer.

If you value vehicle-specific consumer protections, fixed payments and potentially greater flexibility, HP may be worth considering.

If keeping monthly payments lower and changing your vehicle regularly are priorities, PCP may be worth exploring.

The important thing is to compare your options.

Don’t Just Compare the Monthly Payment

A £399 monthly payment isn’t necessarily better than a £429 payment.

You need to know:

• How much deposit is required?
• How long is the agreement?
• What is the APR?
• What is the total amount of interest?
• What fees apply?
• Is there an Optional Final Payment?
• What is the Total Amount Payable?
• Who owns the vehicle during the agreement?
• What happens if you want to change the vehicle early?

Looking at the complete agreement gives you a much better picture than looking at one monthly figure.

Can I Get a Car Finance Quote Without Affecting My Credit Score?

Some lenders and finance providers can offer an initial eligibility check or quotation using a soft credit search, which generally does not affect your credit score in the same way as a hard credit application.

A full application may subsequently require a hard credit search.

Customers should check what type of search will be undertaken before proceeding.

Can I Part Exchange a Car That Still Has Finance Outstanding?

Yes, in many circumstances.

The outstanding finance must normally be settled as part of the transaction.

For example, if your vehicle is worth £20,000 and your finance settlement is £16,000, there could potentially be £4,000 of equity available towards your next vehicle.

If the settlement figure exceeds the vehicle’s value, there is negative equity which would need to be dealt with as part of the transaction.

Never sell a vehicle with outstanding finance without ensuring the finance is correctly settled.

Can I Finance a Used Car?

Yes.

Vehicle finance isn’t restricted to brand new cars.

Subject to lender criteria, finance can be available across a wide range of used vehicles, including petrol, diesel, hybrid and electric cars.

The products and terms available can depend upon factors including the vehicle’s age, mileage, value and the customer’s circumstances.

What About Financing an Electric Car?

The same fundamental choices apply when purchasing an EV: cash, personal loan, HP or PCP may all potentially be available.

However, electric vehicles introduce some additional considerations including battery condition, range, charging and future residual value.

If you’re considering buying an electric vehicle, visit our Redgate Lodge EV Hub, where we explain EV battery health, charging, range, ownership and buying a used electric vehicle.

Can Redgate Lodge Arrange Car Finance?

Yes.

Redgate Lodge can help customers explore vehicle finance options through our panel of finance providers, subject to status and lender approval.

Our aim isn’t simply to find a monthly payment that fits your budget. We want customers to understand the type of agreement they’re considering, its cost and the options available to them.

If you’re considering taking a personal bank loan to purchase your next vehicle, it can be worthwhile obtaining a vehicle finance quotation as well.

You can then compare the two and decide which solution works best for you.

A bank loan may be right for you. HP may be right for you. PCP may be right for you.

The important thing is making an informed comparison.