When it comes to car loans, knowing the key differences between a secured and unsecured loan can help you get the right financing plan for you.
However, hire purchase plans, credit cards and leasing agreements, such as a personal contract purchase can also get you behind the wheel of a new car – whether it’s immediately from the manufacturer or a second-hand dealer.
Personal, or unsecured loans can typically offer as much as £25,000, so if you’re looking to use a loan to finance the bulk of the purchase of a luxury or sports vehicle, then it could be worth taking a look at secured loan options.
Secured loans are for homeowners who are still paying off their mortgage, allowing them to borrow larger sums, occasionally to the tune of up to £100,000 depending on the bank or building society.
This comes at the cost of putting your property up as collateral. This means that if you fail to repay your debts then your home can be repossessed by the lender.
As a result, consumers with a low credit score are more likely to be accepted for a secured loan. That isn’t to say that an unsecured loan doesn’t come with its own credit checks, but they are generally quicker to process than a secured loan.
The outcome for consumers taking out an unsecured loan though is invariably, a higher rate of interest. This is because the lenders are taking more of a risk by not backing the loan against the value of your property.
The smaller loans also means smaller terms for repayment, which could be difficult to keep up with depending on your circumstances. Meanwhile, a secured loan provider may have terms as long as 20 years.
Deciding between a secured and unsecured loan ultimately comes down to weighing up how much you need to borrow, how long you’re willing to keep up repayments for, and how solid your finances are in the face of a repossession threat.
Once you’re approved for a loan, you can use the money to purchase a car, and it’s yours. On the other hand, a hire purchase plan can help you finance the transaction in monthly instalments but it won’t give you ownership of the vehicle until the last payment is made.
Many dealers offer up hire purchase plans, allowing consumers to buy a car over a fixed period of time. The advantage being you can drive the car from the start of the agreement, but not without its own limitations.
Not many car dealers will accept credit cards for a car purchase so be open to other car loan options
Car dealers will not usually let you leave with the car keys unless an initial deposit has been paid, but a larger deposit can reduce the size of your monthly repayments.
As the car still belongs to the dealer, it can be repossessed if you fail to keep up with repayments – and re-selling the car isn’t an option unless the debt has been paid off.
A PCP or personal contract purchase is a lease agreement that bears some similarities of a hire purchase plan, except that the final outcome at the end of the monthly repayments allows you to hand the car back if you're no longer interested in keeping it.
The monthly repayments with a personal contract purchase are usually smaller than with a hire purchase plan and some PCP car financing options can include cover for maintenance costs.
However, there is the added risk of being charged penalty fees for going over the mileage allowance.
If you’d like to own the car at the end of the scheme, then you can opt to pay a balloon payment, which is usually much higher than the monthly payments would have been. If you’d just like the car for the period agreed, then you can hand it back.
As with the hire purchase plans, you do not own the car until the final balloon payment is made, so it comes down what you intend to use the car for.
If you plan to drive regularly then the mileage cap can be a real disadvantage but a personal contract purchase can offer a degree of flexibility if you’re unsure of your driving needs for the near future.
Signing up for a new credit card can come with added perks such as a 0% introductory offer, which could be of use if purchasing a second-hand car, as the value you’re allowed to borrow will be relatively small.
If you can afford to repay the full amount within the introductory interest-free period, then you can purchase the car without paying any interest.
On top of that, you get extra security as you'll be covered by the Consumer Credit Act, which means should something go wrong with the purchase, such as the dealership going bust and disappearing with your money and the car, then you can claim your money back from the card provider.
This applies to purchases between £100 and £30,000. Read more about credit card protection and consumer rights.
However, it’s best to proceed with caution as you could get stung by high-interest rates if you make any repayments outside the introductory offer period.
It’s worth assessing your credit score beforehand as 0% credit card deals are usually only available for consumers with good credit.
Also, it's worth noting that many car dealers will not accept credit cards as a form of purchase for a car, so keep your options open when looking around for a car loan.
Another disadvantage is that your credit limit may not cover the full expense of the car, so you'll need to make sure you have enough in cash savings to cover the rest.