A guide to getting a car loan (UK)

A man sat in his brand new car

Purchasing a car doesn’t usually come cheap, and it’s probably one of the most expensive physical items you’ll buy at some point in your life, whether you purchase it outright or on finance.

When it comes to finding the money to pay for a car, there are a few payment methods that you’ll probably be considering, one of these might be a car loan. 

In our guide to getting a car loan in the UK, we’ve put together our best tips on everything you need to know about what you need to qualify for a car loan, how to check your car finance eligibility, how to get out of a car loan you can’t afford, plus everything you need to know about applying for car finance.

What are car loans and how do they work?

A car loan, also known as car finance, is essentially when you borrow money from a lender in order to purchase a car. Depending on the type of loan you take out, you will have to repay the loan in the form of monthly payments until it’s all paid off and then you eventually own the car.

What is a PCP car loan?

PCP car finance stands for Personal Contract Purchase and it involves putting a deposit down and then making monthly repayments towards the cost of the loan.

At the end of the loan term, the car doesn’t automatically belong to you, but you can choose to make a final lump sum payment, known as a balloon payment, in order to purchase the vehicle outright. Or, you have the options of part-exchanging it for another new model and starting a new contract, or you can walk away altogether.

Hire purchase

Hire purchase is somewhat similar to PCP, but the loan is secured against the car, so you don’t own the car until the last payment is made.

Personal loan

A personal loan is another way to get a car loan and it involves borrowing a fixed sum of money from a lender and then you agree to pay it back over a pre-agreed period of time via monthly payments. This type of loan is also known as an unsecured loan, and you can often find rather attractive rates for borrowing money through a personal loan.

You might like: 7 important things to know before getting a personal loan

Pre-approved car loan

Getting pre-approved for a car loan can help you to secure the best interest rates and the best deal on your car loan. In order to get pre-approved for a car loan, the lender will check your credit report and score in order to see the size of the loan you’ll be eligible for and the best interest rate. 

Who can get a car finance loan?

In order to be accepted for car finance, you must be at least 18 years or older, and the criteria for being accepted for a car loan differs between each provider.

What credit score do you need to get accepted for a car loan?

Credit score requirements differ between each lender, so it can be said that there isn’t one exact credit score that you need to be accepted for a car loan.

However, obviously the better credit score you have, the easier it will be for you to be accepted and the better rate you’re likely to benefit from.

According to Experian, a score above 781 will see you benefit from the best interest rates and often lower monthly payments, so if you’re looking to get a car on finance, make sure your credit score is as high as possible if you want to get the best deals.

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Can I get a car loan if I have a bad credit score?

It is still possible to get a car loan from some lenders, even if you have bad credit, but you will likely struggle to find a loan with good interest rates and you may be required to put down a larger deposit, as lenders might be less willing to lend you the money.

If you’re really struggling to obtain a car loan with bad credit, you could ask someone to cosign the loan with you which means their good credit score will influence the interest rate and could mean you’ll get a better deal.

What is the best bank to get a car loan from?

There are several places you can get a car loan from, and it’s always best to do as much research as possible and compare loans from different providers to see which one is best suited to you. Take a look at some of the best banks that offer car loans.

  • Sainsbury’s Bank
  • Tesco Bank
  • Halifax
  • First Direct
  • MBNA

What details do I need to apply for a car loan?

When applying for a car loan, you will need to provide the following details:

  • Personal details such as full name and date of birth
  • Driving licence/proof of identity
  • Proof of address
  • Proof of income

What happens if I want to repay my car loan early?

While repaying your loan early might seem like a good idea, many lenders will actually charge you to repay your loan early (similar to mortgage lenders) and they might ask for a “settlement figure”. Therefore, it’s not always a good idea to repay it early, and instead, you should just focus on paying it on time every month.

Cancelling your car loan

There are several reasons why you might want to cancel your car loan, such as a change in your financial situation which means you can no longer afford the payments, or you may no longer have a use for the car that you got on finance.

Under Section 99 of the Consumer Credit Act, if you wish to cancel your car loan, you can do so in some circumstances. If you need to cancel your car loan, you should get in touch with your lender to arrange an agreement in which you can terminate your car finance contract.

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