Car finance vs bank loans

You can be charged additional fees with both car finance and personal loans – you might have to pay an admin fee, or you could face a charge if you make a late payment or even if you want to repay early. 

Car finance and personal loan providers won't necessarily charge the same types of fee, though. For example, a car finance firm could charge you at the end of the deal for going over an agreed mileage limit, though this type of fee doesn't exist when taking out a personal loan.

Whichever the type of borrowing, any potential fee should be made clear to you before you take out either car finance or a personal loan, so if you're not sure, ensure you find out and fully understand total costs before going ahead.

Car finance and personal loan repayments generally involve monthly payments over a set term. That said, there are differences to how these are structured and managed.

For more info on how repayments work in relation to specific types of car finance and personal loans, see the following dedicated MoneySavingExpert guides:

• Cheap personal car loans

• Cheap Personal Contract Purchase

• Cheap Hire Purchase

• Cheap car leasing

You will generally need to put down a deposit for a car finance agreement but not for a personal loan – though there are zero-deposit car finance deals out there.

With car finance, a deposit can act as the initial payment of your agreement. Bear in mind too that paying a bigger deposit can reduce your monthly repayments and the amount of interest paid, so consider this if you decide to take out a car finance deal.

A major difference between car financing and bank loans is vehicle ownership. With a car finance deal, the lender will remain as the owner of the car until the debt is fully repaid. (Be aware though that this means it's able to repossess the vehicle if you struggle to repay the debt.) Then, at the end of the contract, you're able to choose to take ownership of the car, unless you decide not to as part of a PCP agreement or because you're leasing the vehicle.

In contrast, you'll own the car from the off if you use a personal loan to buy the vehicle. This is because you'll use the money borrowed to purchase the car outright, before paying back the lender over the length of the agreement.

The eligibility requirements for car finance agreements and bank loans are similar but with some distinctions. Here's a look at what is typically required:

General eligibility requirements for both car finance agreements and personal loans

• Age. You must be at least 18 years old, with some lenders only allowing those aged 21 and over to borrow from them.

• Residency. You typically must be a permanent resident of the UK, and proof of address is often needed (such as a utility or council tax bill).

• Income. Most lenders will want proof that you have a stable and sufficient income so they can be confident that you will make the repayments. It will verify this through recent payslips, tax returns or bank statements. Some lenders may also have a minimum income requirement.

• Employment status. Lenders prefer if you have worked in your current job for a certain period – typically at least three to six months. If you're self-employed, you may need to provide additional documentation such as tax returns or business accounts.

• Credit history. Your credit record will affect your ability to access any form of borrowing, and the better your credit score, the more likely you are to be able to access lower interest rates.

• Debt-to-income ratio. Lenders typically assess your debt-to-income (DTI) ratio to ensure you can manage additional debt. As explained below, a lower DTI ratio is generally better.

Specific requirements for car finance agreements

• Vehicle information. The car finance provider will usually want to know the car's make, model, year, mileage and vehicle identification number. The car might also need to meet certain age and mileage limits set by the lender.

• Insurance. Proof of comprehensive car insurance is typically required, with the finance company named as an interested party.

• A deposit. A deposit may be required, though some lenders offer no-deposit options. Providing a larger deposit can lead to better loan terms.

Specific requirements for bank loans

• Purpose of the loan. Banks often require a reason for the loan, which in this case is obviously to buy a car.

Your debt-to-income (DTI) ratio is a measure used by lenders to evaluate your ability to manage monthly payments and repay debts. It's calculated by dividing your total monthly debt payments by your gross monthly income. A lower DTI ratio indicates that less of your income is going towards paying debts, which is generally viewed positively by lenders. A higher DTI ratio suggests the opposite.

With both car finance and a personal loan used to buy a vehicle, you'll need to have car insurance cover in place – this is required by law. See our How to get cheap car insurance guide for full help in finding yourself the most suitable and wallet-friendly policy for you.

Some car finance providers may offer you car insurance as part of a package, with its cost included in your monthly repayments. However, always check how much this will cost and see if you can get it cheaper elsewhere, using our cheap car insurance guide.

Do note that car finance lenders may also try to upsell your further insurance cover on top of standard car insurance. Examples of this include payment protection insurance and gap insurance.

Bear in mind that this additional cover IS NOT mandatory, so you'll need to decide whether it's necessary in your circumstances and whether it provides value for money – ensure you do your own research beforehand so you can make an informed decision.