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How to get a car loan

How do you get a car loan? What tips are there to getting the cheapest deal? Here's a step-by-step guide to how to get a car loan.


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When it comes to financing a new car, there are several routes you could take – including taking out a personal loan.

While a loan for a car can be a relatively cheap and flexible way to finance your wheels, there are a few things to consider before you take the plunge and hit apply.

Car loans vs specialised car finance plans

Firstly, it’s worth explaining the subtle difference between car loans and car finance.

With either of these options, you split your car’s cost into monthly instalments instead of paying the full price upfront.

  • A car loan is a personal loan you take out to pay for a new or used car

  • A car finance plan refers to a specialist financial plan which is secured against the car itself. This is the kind of plan you’ll get if you take out finance through a dealership (even though you can get this from many regular lenders too).

The key difference between a car loan and car finance plans is that with a car loan, you own your car from the beginning, rather than leasing it from the lender or dealer. It also means you won’t have to pay a deposit upfront, as you’ll be putting down the loan as your payment.

Is a car loan right for me?

Using a personal loan to buy a car is often the cheapest finance option (apart from buying it straight up), as interest rates will usually be lower than on car finance plans.

Car loans are also a bit more flexible than Hire Purchase or PCP deals. You can choose your own loan terms (i.e. how long you want your loan period to be) and you’ll have more control over how much you borrow. For example, if you have some cash to put towards the car, you can take out as big or as small a loan as you need to cover the rest.

You’ll also own the car outright from the beginning, which means that unlike with other financing options, you can sell it at any time. But don’t forget, you’ll still have to pay off the full value of the loan plus interest.

What to watch out for

The main disadvantage of car loans comes down to your credit score. Because a personal loan isn’t secured against anything, lenders will usually have stricter criteria about who they lend to at a good interest rate. So, if you don’t have a particularly high credit score you may either struggle to be approved or be offered a much higher APR than advertised.

It’s worth shopping around too, as sometimes you may actually get better offers on car finance if the dealership is wanting to sell stock quickly. If you need your wheels quickly, finance from a dealership can be a little more instant, whereas it may take a little more time for a car loan to come through.

Like any other form of credit, a car loan could affect your credit score. Credit applications may make your credit score dip (although it should go back up once you start making repayments). You’ll need to keep up the repayments or your credit score could suffer.

1 – Get yourself in the best position to be accepted for credit

Before you start applying for a car loan – as with any type of credit - it’s worth seeing if you can improve your credit score. This way you’ll be able increase your chances of being accepted for a loan on the best (cheapest) terms you can.

2 – Find out what kind of loan you’re likely to be accepted for

It’s always a good idea to check pre-approval before you start car shopping. This will give you an idea of how much you’ll be able to borrow before you apply. This way you won’t end up falling in love with a car you can’t afford.

If you can’t get pre-approval you can use an eligibility checker online. This will help you understand how likely you are to be accepted for a loan of a certain amount, e.g. 70% chance of acceptance.

This means you can be selective with the applications you make, only going for the loan you’re most likely to get. Remember that making multiple applications which could harm your credit score.

You can check for preapproval and eligibility on the Offers section of your ClearScore account.

3 - Shop around for the best loan you can get

You can find a loan online or in person from a bank or a building society, or go through a broker online.

Different providers are in competition with each other so it’s absolutely worth shopping around to see what kind of offers you might be eligible for.

The main thing you’ll want to compare is the APR - known as representative APR.

The APR shows you the interest rate and any charges that you’ll be charged on a loan over the course of a year. So if the representative APR is 7%, then on average over a year it means you’ll be paying 7% on the amount you’re looking to borrow.

Be aware that you’re not guaranteed to get the representative APR rate. In fact, a lender only has to offer this rate to 51% of people who apply. But the better your credit score, the more likely you are to be offered a cheaper APR.

4 - Agree to the terms of the loan

You decide the term of your loan at the application stage. Car loans are usually repaid over three to five years, but some lenders might allow longer terms. The longer the term, the lower your monthly repayments. However, you’ll also pay more interest overall.


Andre is a former lawyer turned award-winning finance writer.