Car Loan or Car Finance: What’s The Difference?

how to buy a car

Are you thinking of financing your next new or used car? There are many ways to finance a new or used car and the complicated jargon on the internet can often make it a difficult place to get information fast.

A car loan is one of the many ways that you can finance your next car.

But what exactly is the difference?

Firstly, I must stress, that regardless of whether you’re thinking of a car loan or car finance, you should make sure that you’re able to afford the repayments of whatever finance option you choose.

Most people when taking out car finance or a car loan will often only look at the sticker on the front of the car’’s window at the dealership.


Will get bogged down by the sales guy persuading you to go with car finance as it’s only £499 a month!

How often have you heard or seen this persuasion being used when you’re trying to finance a new car? It’s a great sales technique from the dealer’s point of view.

Should I Use Cash Or My Savings When Buying A Car or A Car Loan?

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In an ideal world, you’d have some amount of money saved up in your bank account, or money put aside for buying a car so that you don’t have to take out a car loan or get into a car finance agreement.


For most people, this isn’t always the case.

We’re hard working individuals, we’ve got rent or a mortgage to pay, bills, credit cards to pay off and tend to be a little short on cash.

For these reasons we often get pulled into the obvious car finance options which tend to be:

  • PCP (Personal Contract Purchase) agreements
  • HP (Hire Purchase) agreements

These agreements and contracts can last anywhere from 36 months all the way up-to (and beyond) 60 months and in the case of a PCP car finance agreement…

You don’t own the car until you’ve paid the optional final payment.

As humans, we like to have control over what we spend and how we spend it, so my advice to you is simple:

Purchase your next car with cash. Cash is king!

Tips When Buying A Car With Cash Instead Of A Car Loan

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In order to figure out whether you can buy a car with cash or savings, you should be realistic with yourself and what money you currently have.

Don’t try to use up all of your savings when buying a car as you likely won’t have enough money to cover all of the costs associated with buying and maintaining a car, remember:

  • If you don’t have enough savings to buy a car, try and use as much as you comfortably can afford to use a deposit on a car.
  • Check that you’ll have enough savings leftover before buying a car, you’ll need money left over for an emergency.
  • Even if you can use your savings, try and spread some of the cost onto your credit card, this means that your credit card provider will be jointly responsible for the purchase of the car.

Using A Car Loan (Personal Loan) To Buy A Car

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Buying a car with car finance is often the most common way to finance a car, but can leave you with uncertainty in the future (further down the road into the monthly repayments).

You might question yourself whether you’ll lose your job and what will happen if you’ve taken out car finance right?

It’s a completely valid question to doubt yourself in unknown circumstances and new territory.

That’s where a car loan can be helpful!

What Is A Car Loan?

So, you might be wondering what exactly is a car loan?

To put it simply, a car loan is a personal loan that you take out with your bank or building society.

If you’ve been with your bank for a number of years, they’ll hold more accurate information about how you spend your money and what income is coming into your bank account.

This is how I bought my car. I researched what a car loan was, and found out the differences before jumping into this form of car finance.


  • You’ll own your car from the beginning, meaning if you were to be unable to cover the car loan repayments you could sell the car to pay off the debt.
  • Lower interest rates and more flexibility.
  • It’ll cover the whole cost of the car, but it doesn’t always have to – you’re in control.


  • You’ll need to complete a comprehensive and detailed finance check, and will need to wait for the funds to be available in your bank account.
  • You could be affected when trying to make other borrowings from your bank.
  • Your monthly loan repayment might be higher than with PCP or HP car finance.

Unlike with car finance, your personal credit score is likely to make a bigger impact when trying to take out a car loan or personal loan.


Because you’ll likely be taking out a larger amount of money, and this is considered to be higher risk when compared to car finance such as HP and PCP.

Buy A Car With PCP Car Finance (Personal Contract Purchase)

A car loan is a great choice if you’re tightly managing your money right?

But there are other options to finance your next new car, whether you’re looking to jump into a brand new BMW, or even a fancy Mercedes, car finance could be the answer to this problem.


Because PCP finance is going to offer you a lot of flexibility, and is likely going to give you lower monthly costs when compared to a car loan.

What Are My Options With PCP Finance?

With PCP car finance you’ll have a few options, this is what makes it an extremely flexible choice for car finance.

At the end of the finance term, you can:

  • Give the car back, walk away without having to pay monthly repayments.
  • Trade the car in to get a newer model and keep repaying monthly repayments.
  • Pay the optional final payment (often referred to as a balloon payment)

Sounds great doesn’t it?

And it often is, if you set your expectations with PCP finance. You’ll always be paying for your car, and whilst the lower monthly payments might seem inviting, all you’re doing is offsetting the monthly payments and moving the rest over to that final payment.

The optional final payment in a PCP contract can be upwards of £10,000 that you’ll have to pay in one go.

I don’t recommend taking out a car loan to pay off the final payment at all.


  • You’ll have lower monthly payments making it easier to pay for other things like mortgage and rent.
  • You typically will get 3 options at the end of the finance agreement – giving you control with what you want to do.
  • Flexible finance options, they can be anywhere from 12 months to 48 months in length.
  • A lower deposit of around 10% – 15% is all you’ll need for most cars.


  • You won’t own the car until you pay the final balloon payment, you’re liable for damage to the car until this payment is made.
  • The final payment can be thousands of pounds.
  • If you exceed the agreed annual mileage you’ll need to pay extra per mile over the agreed limit.
  • Extra fees and charges will apply for any damage done to the car!

PCP might seem like an inviting deal, but more often than not PCP deals are designed to get people with a poor credit score onto these deals, and this isn’t good.

PCP Car Finance With Poor Credit

That’s right, the title is exactly what I’m talking about here!

Have you got poor credit and need car finance?

I mean… it is possible, and you’re likely to come to some kind of agreement with a car dealer and your monthly repayments, but ultimately if you’ve got poor credit I’d strongly advise against getting any form of car finance and try for a car loan instead.

If you’re not too fussed about the car that you’re looking to buy, then consider a cheaper car and get a car loan to cover the cost of buying the car.

Buy A Car With HP Car Finance (Hire Purchase)

Another form of car finance that is similar to PCP car finance is indeed HP finance. You might’ve heard of this one, but it often isn’t as hyped by car dealers when compared to PCP finance.

HP finance isn’t as flexible when compared to PCP car finance, but one thing is for sure…

You will own the car at the end of the finance agreement.

And for some individuals and families, this makes better financial sense. 

But it’s only any good if you plan on keeping the car in the long run, and honestly, you’re likely going to want that next new model in 2 or 3 years time right?

Newer car models often come with better, more advanced features and car dealers make it very inviting for individuals.

Will I Own The Car With HP Finance?

Absolutely, at the end of the finance term you will own the car and won’t have to pay any additional fees.

But what are the benefits and are there any negatives with HP finance?

Yes, there are, let’s have a look at them:


  • Usually a higher deposit when compared to PCP finance, but a low deposit of around 10% can be ideal on some cheaper car models.
  • Flexible repayment terms, usually between 12 months to 60 months for HP finance.
  • Competitive interest rates are up for grabs.
  • Easy and quick to get up and running with a contract.


  • It’ll likely be more expensive than PCP finance or a car loan for short term agreements.
  • You don’t own the car until the end of the agreed finance agreement.

So as you can see, there are absolutely some benefits of HP car finance when compared to PCP finance or even a car loan.


We’re not done here.

There is a fourth option to finance your next car that isn’t a car loan, HP finance or PCP finance, let’s look into that one as it might make sense with some more expensive cars:

Car Leasing – Known As PCH (Personal Contract Hire)

So, we’ve covered three ways to buy your next car, and you might be stuck in the mud trying to pick between them.

If that’s the case, then car leasing might be the choice for you.

Unlike a car loan, PCP and HP, with car leasing you’ll pay a fixed amount per month, over an agreed term. You won’t own the car, neither will you have the choice to own the car, but you could be driving a newer, more expensive car at a lower cost.

Sounds ideal right?

As long as you don’t exceed the agreed mileage limit and consider your other financial commitments, PCH can cover all of the costs of owning and maintaining the car, this can make for trouble free motoring!


  • Lower, fixed monthly costs over a period of time.
  • Flexible payment terms, they can range between 6 months and 36 months (check with the leasing company).
  • Car depreciation usually isn’t an issue with car leasing.
  • Likely to include car servicing (or it might come at a slightly extra cost).


  • You’ll never own the car, you won’t have the choice to buy the car either.
  • You will need to provide a car deposit, this is usually called an initial rental and can range from 1 month to a few months.
  • Can cost extra if you exceed an agreed annual mileage.

Leasing a car instead of a car loan can give you the flexibility to drive almost any car and take the majority of motoring issues out of the equation making it easier for you to focus on what matters.

Personally, I like the idea of car leasing, but would advise against leasing if you’re struggling to make payments elsewhere such as on credit cards, mortgages or rent.

You might even be able to jump into an expensive Range Rover, or Jaguar with car leasing.

Can I Buy A Car With A Credit Card?

Can’t make your mind up what the best decision is?

If you’ve looked at car finance options such as a car loan, PCP, HP or PCH and still aren’t sure, consider financing your car with a credit card.

Why a credit card?

Because if you’re buying a used car, or an older car you’ll be able to save money in the long run with car depreciation and your credit card provider will be jointly responsible in this deal.

How To Find The Best Credit Card Deals?

If you’re stuck trying to finance a car and are looking at the possibility of car finance with your credit card, the simple advice here is:

Make sure that you shop around, do your research and consider speaking to your bank first.

What To Look Out For With A Car Loan

What to look for when buying a car

Regardless of the car finance option that you choose, you want to make sure of a few things before entering any form of car loan or car finance agreement right?

You want to make sure that you’re in the best finance deal and that you can absolutely afford the car loan or car finance!

Things To Look Out For

  • Make sure that you can afford any monthly repayment whether that’s on a PCP contract, HP, PCH or a car loan.
  • Beware of any early exit fees involved with car finance – check your finance agreement.
  • Compare interest rates before making any decision.
  • Think carefully before opting into any protection plans in terms of how long you’re going to keep the car etc.
  • Ask yourself – will you actually be able to afford the running costs of the car? Will something break down?

These are some things to look out for, but the list I’ve given you isn’t a one list fits all, your situation and circumstances will differ from mine and someone else’s.