Money Advice Service

If you need finance to buy your car, a personal loan from a bank or building society is likely to be the cheapest way of borrowing the money. But remember to look into the pros and cons of personal loans first. Read on to get the facts you need.

Important points to consider


Make sure the loan isn’t secured against your home, otherwise the roof over your head is at risk if you don’t keep up the repayments.

Shop around for the best interest rate by comparing annual percentage rates (APR). The APR includes interest and all of the lender’s other charges.

Also check the monthly repayment amount and the total amount you’ll end up paying the lender.

If you’re not sure whether you could meet the monthly payments on top of your household expenses, work out what you can afford.

Personal loans come with a cooling-off period from either the date you sign the loan agreement or from when you receive a copy of it – whichever is later.

If you cancel, you have up to 30 days to repay the capital and interest.

Pros of personal loans

  • Can be arranged over the phone, internet or face-to-face.
  • Can be for the whole cost of the car, or for a part of it.
  • Good fixed interest rate if you shop around and have a good credit rating.
  • You choose the loan period (12, 24, 36 months and so on), but remember – the longer the term the more you pay in interest overall. For example, if you were to borrow £10,000 over two years at 5.9% APR, the interest cost would be £614. Borrow the same amount over five years and it would be £1,541.
  • Unlike with other forms of credit, you own the car while paying off the loan so if you got into financial difficulties you could sell it. Check with the lender this would be the case before taking out the loan.

Cons of personal loans

Top tip

If you’re planning to borrow just under £3000, it might be worth borrowing a little extra in order to get a cheaper rate.

This is also true if you want to borrow just under £5,000.

For instance, the APR for loans of £3,000-£4,999 could be 12%, yet as little as 5% for loans of £5,000-£7,499.

  • You might need to wait for the money to come through, although some lenders make funds available almost immediately.
  • Personal loans aren’t always the cheapest way of borrowing. Sometimes car dealers offer 0% or very low interest deals to shift their stock, often on a ‘flat rate interest’ basis. But make sure you also ask what the annual percentage rate (APR) is as well, as it includes all other charges as well as the interest. When comparing loans, always focus on the APR and the total amount payable.
  • Taking out a personal loan might affect your credit rating. Be careful about this if, for example, you’re also planning to take out a mortgage.

Use our loan calculator to work out your repayments

If you’re thinking of getting a loan, use our Loan calculator to work out how long it would take to pay it off and how much you’d need to repay each month.

You can also compare different rates and lengths of loan.

If you’re comparing loans online, make sure you check them on a few different comparison sites. Here are some suggestions:

Your next step

This article is provided by the Money Advice Service.