How To Get A Car Loan: Your Guide To Applying and Making Payments

Chloe Murphy 6 minutes Published: 17/06/2021

Cars are the one of the biggest financial investments you’ll make, so choosing the right finance option can be pretty daunting.

Using a loan to finance your car is increasingly popular as it allows you a great deal of flexibility on the car you get, and it’s yours right away. You can purchase directly from the dealer or manufacturer, or use the loan for a private sale. 

Personal car loans are one of the simplest methods for financing a car, but it’s still important to understand how it works. 

We’ve done a whole guide on “what is financing a car” but in this guide, we’ll discuss the process of getting a car loan, covering everything from applying to making payments. 

How does a car loan work? 

Personal car loans work by allowing you to borrow a sum of money to cover the cost of purchasing a car. You then pay this back with interest over a set period of time agreed with the bank or finance provider.

Just find a car that you want to buy, then check the interest rate for the amount you need to borrow. 

When applying for a car loan, there’s a few things to think about:

  • The Down Payment - Putting a down payment towards the car yourself will help reduce the amount you need to borrow, and you’ll be able to pay off your loan more quickly with less interest.
  • Annual Percentage Rate - This is the interest charged for borrowing the bank’s money. Though finance companies can advertise low rates, not everyone will be eligible for them.
  • The Loan Term - Deciding how long you want to pay back the loan is one of the most important aspects. You should be realistic about what you’re able to afford, but bear in mind, the longer the loan term, the more interest you’re going to pay.

Once you’re approved, the money will be transferred to you and you can purchase the car whenever you want, from wherever you want! Since you own the car right away, you’re free to modify it, or even sell it if you like.

What you need to consider before applying

It’s easy to get caught up in the excitement of owning your brand new car, but there’s a couple of things you should consider before you begin applying. 

Your credit score

If you’re thinking about purchasing a car in the near future, it’s best to check your credit score as far in advance as possible. This means you can rectify any issues before your loan application. You can check it on sites like Experian, Equifax, and Credit Karma.

Some lenders will have specific requirements they ask you to meet, so being prepared helps avoid any disappointment. Plus, you’ll have a chance to try to improve your rating for when you’re ready to buy. 

You can still get a loan with a poor credit history, but you’ll face higher interest rates, and it could work out pretty expensive if you take it with a lengthy repayment period.

How much can you afford to borrow

Since most drivers don’t have the cash to pay for their car upfront, paying for your car across a couple of years is fairly common. But just because it looks like you could be approved for a huge loan, doesn’t mean that’s what you should go for. 

If you have to take out the longest term just to ensure you’ll be able to make your payments, it’s worth thinking about whether you’re spreading your finances too thin. On top of the monthly instalments for the car, you have all the costs of running and maintaining the car, like insurance and fuel. 

Shop around

It’s not just important to shop around for the best price on your car, but the best deal on your loan too. Looking across different sources like banks, credit unions, and online lenders will help you find the lowest interest rates.

Just be careful not to submit numerous applications over an extended period of time. Applying for credit typically leaves a hard search on your credit report, and when these pile up (or you get repeatedly rejected), this can have a negative impact on your score.

Things to keep on top of when approved for loan

It’s great to be approved for your loan, but it’s not all sunshine and daisies from there. 

Your credit score will continue to be affected depending on how reliable you are with your payments. Making your payments on time will build a positive rating, whilst being late or short on bills will begin to have a negative impact. 

Missed or late payments will appear on your credit history, and can be viewed by future prospective lenders for up to 7 years. This means that even if your credit score is good, they may think twice about approving you.

Is it right for me?

Using a personal loan to finance your car is a great way to affordably get driving, whilst improving your credit rating. 

Whether it’s the best way to finance a car really depends on you, and you may be wondering “should I get a car on finance or not?”. We’ve put together our top pros and cons for you to consider before applying.

Advantages of a car loan

  • As soon as you transfer the money to the dealer/seller, you’re the owner of the car. No stressing over mileage limits or damage charges as the car is yours to do whatever you like.
  • You have more flexibility with longer repayment schedules.
  • It’s simple - you borrow the money and pay it back over a timeframe that suits you.
  • You have more choice - you can look into private sales rather than just a dealer or manufacturer. 

Disadvantages of a car loan

  • You may struggle to be approved for a loan with a poor credit rating.
  • All responsibility that comes with ownership falls on you, i.e. repairs and maintenance.
  • It’s great to own the car, but you’ll have to face the sad reality of depreciation if you want to sell down the line. 

Alternatives to a car loan 

A personal loan might not work for everyone, but there are alternatives to consider. Aside from a personal loan, you can also finance your car through personal contract purchase, hire purchase, or leasing. 

Here’s how they work:

  • Personal Contract Purchase (PCP) - Pay a deposit and a monthly payment over your chosen contract term, then return the car, pay the balloon payment to purchase, or trade-in for your next car on a new PCP deal. You’ll have to agree to an annual mileage. See our “what is PCP finance” post for more info.
  • Hire Purchase (HP) - Pay a deposit, then set monthly payments that contribute towards the total cost of the car. At the end of your contract, the car’s yours. Few limitations as you’re working towards ownership. See our car hire purchase overview for more details. 
  • Lease deal - Also referred to as Personal Contract Hire (PCH) or Business Contract Hire (BCH), you pay a deposit, a monthly fee till the end of the term, and then hand the car back. You’ll have a mileage limit, but a brand new car with lease car warranty and road tax included in the lease price. No MOT (assuming your deal is 3 years or less). See our “how does car leasing work” guide to learn more.
  • Lease Purchase - Like contract hire leasing, you pay an initial rental and monthly payments, but at the end of the deal you have to buy the car by paying a final balloon payment.

Reading through all the details can be a lot to take in, so if you’re still undecided, don’t stress. Finances like PCP and leasing operate quite similarly, so it can be hard to tell which is the right choice. Luckily, we’re here to help with all of these comparison posts!

If it seems like finance isn’t right for you, you can always purchase your car with cash upfront or buy a car on your credit card. There’s still a lot to consider before jumping into this, as like with a personal loan, you immediately have full responsibility for maintaining, servicing and running the car.