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Is it cheaper to get car finance or a loan?

Written byKoyo Loans
First published21st October 2022
  • Introduction
  • Is it cheaper to get car finance or a loan?
  • Can I use a personal loan to buy a car?
  • Is car finance classed as a personal loan?
  • Can you have a personal loan and a car loan?
  • Is a personal loan better than car finance?
  • Can a car loan be transferred to another person?
  • Is personal car loan interest tax deductible?
  • Conclusion

In 30 seconds…

There are lots of ways to buy a car. Among the most popular options are car finance arrangements and personal loans. To work out the cheapest method of buying a car, you will need to work out the APR – annual percentage rate – associated with your chosen method of borrowing. For some people, a personal loan is an ideal way to buy a car, as it enables you to own the car outright and doesn’t come with additional future payments, as is the case with PCPs and other financing arrangements.


In the UK, there are plenty of different ways to buy a car. If you don’t want to empty your savings account to purchase a new vehicle, then there are various forms of credit that you can apply for. To help you decide which is the best financial product for your current circumstances, we explain some of the different loan options and car financing arrangements available to you, which we hope will help you discern which is the best way to purchase your new car.

Is it cheaper to get car finance or a loan?

Applying for a car finance deal and a personal loan are both viable ways to purchase a new car. Car finance loans include products like hire purchases and personal contract purchase (PCP) plans and are offered through car dealerships, while personal loans are available from banks, building societies, and third party providers.

The cost of car finance and personal loans differ significantly from person to person, making it difficult to say outright which is cheaper. However, PCP arrangements often come with the lowest monthly repayments, as you’re not paying towards the full cost of the car. At the end of the agreement, you can trade in your current car and start another PCP for a new car.

To ascertain the cheapest option over the course of the repayment period, you will need to know the annual percentage rate (APR) associated with your chosen method of borrowing. When you know the APR, you can calculate how much the loan will cost you over the agreed repayment period and therefore deduce which is the cheapest way to borrow money.

Can I use a personal loan to buy a car?

A good alternative to car financing is to apply for a personal loan to buy a car. You can apply for a personal loan from your bank or building society or submit an application to an online lender like Koyo Loans.

We offer unsecured personal loans of between £1,500 and £15,000, 24.9% APR Representative that you can use to purchase a new or used car. If your application is successful, we will deposit the money into your account within 24 hours of approval, meaning you have the funds available to complete the upfront cost of purchasing the car.

You will then be able to pay the cost of the car over a specified and pre-agreed period of time, meaning you don’t have to empty your savings to fund the purchase. One of the best things about buying a car outright with a personal loan is that you own it from the very start, as many car financing options are essentially lease agreements and don’t grant you ownership of the vehicle until the end of the repayment period.

Is car finance classed as a personal loan?

Car financing arrangements and personal loans are different financial products. However, they are similar in that they can both be used to purchase a vehicle, and they are both viable options if you’re hoping to spread the cost of your car purchase over a longer period of time.

When you go to a dealership to buy a car, you’re likely to be offered a car financing deal, which could be in the form of a hire purchase agreement or a personal contract purchase plan. These are notably different from one another, but they both make it easy for you to own a car without paying cash upfront. However, with car finance plans, you don’t actually own the vehicle until the end of the repayment period, when you’re required to pay a balloon payment or begin another contract.

On the other hand, personal loans are a stand-alone financial product that you can use for a range of purchases. You might use a personal loan to fund home improvements, pay for a holiday, or to buy the new car of your dreams. Therefore, when you buy a car with a personal loan, you will own it from the very start, and you don’t need to worry about making any future balloon payments to secure ownership of the car at the end of the repayment period.

Can you have a personal loan and a car loan?

Provided you haven’t maximised your debt to income ratio; there’s no reason why you can’t have a personal loan and a car loan at the same time. Remember, personal loans can be used to fund a variety of purchases, and they’re a good source of credit to apply for.

For instance, you might have recently purchased a car via a PCP arrangement with a local car dealer, and you’re now looking to renovate your home kitchen or bathroom. Instead of emptying your savings, you could apply for a personal loan to cover the costs associated with the renovation project, which would mean you have a car finance arrangement and a personal loan ongoing at the same time.

However, if you decide to apply for multiple forms of credit simultaneously, it’s so important that you can afford to do so. Defaulting or missing your repayments will damage your credit score and will make it much more difficult for you to access credit again in the future. So, do your sums and ensure you can afford the loans that you agree to take on.

Is a personal loan better than car finance?

It’s fair to say that personal loans and car finance arrangements are both attractive financial products for some borrowers. In other words, it depends on what outcome you’re hoping for, you can benefit from either a personal loan or car finance arrangement.

For instance, if you want to own your vehicle outright from the very start and don’t want to worry about meeting a balloon payment at the end of your repayment period, a personal loan is probably a better option. The money arrives in your account soon after your application is approved, and you can pay the car dealer outright for the vehicle. You then have the stipulated time to repay the money.

Conversely, a car finance deal might be a better option for you if you like the idea of regularly changing your car, perhaps every couple of years. Hire purchases allow you to essentially lease a vehicle by paying a deposit, followed by monthly repayments. You then return the vehicle at the end of the period and exchange it for another car, which is undoubtedly a viable and attractive proposition to some people.

Can a car loan be transferred to another person?

Although loans can’t usually be transferred to other people, you can usually transfer car loans to another borrower. This is great news if you’ve agreed to a PCP or HP arrangement and find someone who is willing to take it on in your place.

Provided the new borrower qualifies for the original loan, the lender will agree to transfer the loan into their name. The borrower will be subject to credit checks and will be required to meet the eligibility criteria set out by the lender. You will also probably have to pay a fee to change the name on the associated paperwork.

Transferring a car loan to another person is typically a cheaper option than trying to buy your way out of a car finance deal, as they often come with significant financial penalties if you change your mind throughout the course of the agreement. So, if you’ve decided that you no longer want to maintain your car loan, you can try and find a friend or family member to take on the arrangement instead of you.

Is personal car loan interest tax deductible?

If you’ve purchased a car with a loan that you now use for business purposes, you might be able to claim some tax back. For instance, if you’re a sole trader or in a partnership and your business turnover was under the VAT threshold at the time of purchase, you can use HMRC’s AMAP (Approved Mileage Allowance Payments) rate.

This rate covers a range of vehicles, including cars, vans, and motorbikes. It also covers general repairs, servicing and MOT on your vehicle, as well as interest payments that you’re required to pay on your loan. But again, you need to make sure that you are using the vehicle primarily for business purposes to qualify.

You can’t deduct the tax on your car loan interest if you use your vehicle for anything other than work. If you’re unsure of which of your expenses are tax-deductible, it’s best to work with an accountant, as there are so many things you need to consider before submitting your annual tax return.


Ultimately, you have lots of options when it comes to buying a car. Personal loans and car financing arrangements can undoubtedly work for you, but it’s best to consider the terms and conditions of each arrangement before settling on a solution. You can then apply for credit to purchase your vehicle and spread the cost over a longer period of time, which means you don’t have to empty your bank account.

Koyo Loans is the trading name of BETR Technology Ltd. Company No. 11483187. Registered Office: Huckletree Soho, Ingestre Court, Ingestre Place, London, W1f 0JL

Key Takeaways

So, what’s the best way to buy a car? That really depends on your personal circumstances. If you can secure a personal loan with a reasonable APR, it allows you to spread the cost of the car over a defined period of time. You will also own the car from the moment you transfer the money to the seller. Personal loans are affordable, easy to apply for, and are usually in your account within 24-48 hours, making them an excellent form of credit for many potential car buyers.

Car financing plans are slightly different from personal loans, and they’re usually available directly from a car dealer. With most plans, you don’t actually own the vehicle until the end of the repayment period, and you’re given the option of making a final ‘balloon’ payment to own it outright. The bottom line is that car financing plans and personal loans can work for different people.

The key thing to remember is to weigh up the pros and cons of each payment method and fully understand the terms and conditions associated. You will also need to calculate the cost of borrowing money via each method before making your decision.

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