Best Car Loans

All about car loans and the pros and cons of car finance.

Updated: May 18, 2024
Matt Crabtree

Written By

Matt Crabtree

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Are you considering buying a new car but worried about how you will afford it? In today's market, buying a new car can get expensive, especially if you are looking for a newer model: as of January 2023, the average new car costs £39,308.

Even used cars can get expensive, with the average used car prices increasing by 3.2% in June. However, there are different finance options to help you spread the cost.

A personal loan is the most common type of car finance- it's usually the most straightforward option and most accessible.

Getting a car loan can make buying a new car more affordable and help you spread the cost. If this is your first time buying a new car, you may be unsure where to start.

Don’t worry too much; we’ve got you covered. In this article, you'll learn all about car loans and the pros and cons of car finance, and we'll introduce you to some of the top car loans available in the UK.

ProviderScoreDetails
1. AA★★★★★Click Here
2. AIB★★★★★Click Here
3. M&S Bank★★★★★Click Here
4. Sainsbury's Bank★★★★Click Here
5. Post Office★★★★Click Here
6. Tesco Bank★★★★Click Here
7. Novuna Personal Finance★★★★Click Here

What Is a Car Loan?

Car loans are a type of personal loan that is used to purchase a new or used car. Car loans fall under the category of unsecured loans. 

The idea is to borrow money, the total or some of the cost of a vehicle, and you'll typically make monthly payments on the car to the lender. On top of what you pay on the loan, you’ll be expected to pay added interest.  As soon as you take out a car loan, you'll own the car and be able to use it as you wish as long as you keep up with the monthly repayments.

Car loans work by paying an initial non-refundable deposit and then paying regular instalments over time. Some lenders may not require an initial deposit.  The car loan amount and term will depend on the agreement you made in your contract with the lender. 

Information You Need to Provide for a Car Loan

Like any financial commitment, there will be requirements you'll need to meet. Requirements usually consist of positive credit ratings, a certain annual income and more.

Typically, each car loan provider will have their own lending criteria you'll need to meet. 

Whichever car loan you decide to take out, you will need the following documents:

  • Proof of identity: When applying for a car loan, you must prove who you are. Along with all the other documentation, you should use a valid form of ID. The best ID to bring is your driver's licence; you'll need it to provide them with your licence number anyway. You must also show proof of address as part of your proof of identity, usually on your ID. However, lenders may ask for an additional form of proof of address.
  • Proof of income: You'll need to let your car loan lender know where you work, your job title, and how much you earn. You may need to provide at least three months of payslips or bank statements as proof of income to ensure you can afford your monthly payments. Most lenders will require you to earn above a certain amount to qualify for a loan.
  • Bank account details: You'll need to provide details of the bank account from which you'll make your monthly repayments. When you share your bank details, you may have the option to pick a day for your repayments to be made. However, not all lenders will allow you to choose your payment date.
  • A strong credit rating: When taking out a loan, especially with an unsecured loan, you'll need a positive credit history with a high credit score. Your credit score may determine how much of a loan and the APR and other interest rates you'll be offered. Your credit report directly impacts your finance eligibility, so your application may be rejected if you’ve got bad credit.
  • A budget: Looking at many new or used cars is exciting, but it's a good idea to create a budget before you start your search. Measure your monthly income and outgoings and see how much you can repay on a car loan. Knowing how much you can afford for your future car may help you pick car loan options. Use a car loan calculator to help fit your car purchase with your current budget.

Having the above information ready before you apply for a car loan will save you time and help the overall process move forward more smoothly.

Car Finance Loans: Pros and Cons

Exploring the pros and cons is essential to ensure you apply for any finance.

We've compiled a list of pros and cons to ensure you make the right decision when applying for a car finance loan.

Pros

✔️ Spread the cost: One of the more alluring factors of taking out a car loan is that you can spread the cost. You don't have to worry about using up all your funds to pay for a car outright. When you use finance for a car, you give yourself more breathing space and time to pay off the personal loan.

 ✔️ Boost credit rating: Taking out a personal loan and repaying it on time demonstrates that you're a reliable borrower and will help improve your credit report. So, if you successfully get a car loan and manage your payments well, it will reflect positively on your credit score.

✔️ Buy a newer model: Getting a personal loan may allow you to consider buying newer car models than you would perhaps look at if you were to pay for a car outright. Being able to spread the cost may make purchasing a newer car more desirable.

✔️ Maintain monthly budget: If you've got a budget each month, taking out a personal loan is ideal because you'll have a set amount you pay each month that won't change for the duration of your contract, so you can change and stick to your budget accordingly.

Cons

❌️ You have to pay interest: in return for the lender covering the cost of a new car upfront, you'll have to repay the car finance but with interest. So, you'll inevitably pay more than what the car costs. To ensure you pay the minimum interest possible, look at and compare different car loans and choose one with a low-interest rate.

❌️ Consequences for missed repayments: You may negatively impact your credit score if you miss payments or struggle to repay the personal loan.

❌️ Charges for paying your car loan early: Some car finance lenders may charge you a fee for paying off your car loan early. Always look out for how much you'll be charged before you sign an agreement.

❌️ Mileage limits: Some types of car finance ask you to agree to a mileage limit. The limit will be determined at the beginning of your loan term and can range between 10,000 to 30,000 miles. If you exceed the agreed limit, you may have to pay a penalty charge per mile. However, personal loans rarely include a mileage limit.

Best Car Loans UK — Reviews

Car loans can range from as little as £1,000 to as much as £40,000 or more.

We've shown a variety of loan amounts in our top car loans to give you a clear idea of how much you can expect to borrow from each lender. However, each lender may have higher or lower car loans available.

1. The AA: Car Loans ranging from £1,000 – £40,000

  • Borrowing amount: £1,000 – £40,000
  • Borrowing term: 1 – 5 years
  • Early repayment charge: Yes
  • Representative APR: 5.8% – 15.6% for non-AA members, 5.7% – 15.5% for AA members

Representative example: With a loan of £10,000 over a 60-month fixed term, your monthly repayments will cost you £191.21 at a representative 5.7% APR. The total loan cost with interest is £11,476.20. Credit available subject to status.

The AA offers car loans ranging from £1,000 up to £40,000. They have different rate bands. The higher your loan, the lower your APR will be. Additionally, you may benefit from even lower APR rates if you're an AA member.

When you apply for a car loan from AA, you can choose how much car finance you'd like to borrow and how long you want the loan term to be. With this personal loan, there are fixed monthly repayments, no arrangement or set-up fees and in most cases, receive an instant decision.

Once a year, you can change your payment date if you wish to. You can make extra payments on your personal loan without facing a penalty fee. However, if you pay off your loan early, you may get a charge of up to 58 days of interest.

As a new AA Loans customer, you can get 12 months of free Basic Breakdown Cover. You can use AA's loans for a new car, a second-hand car, an electric vehicle, and maintenance for your current car. You can check your eligibility before you make a complete application.

2. AIB (NI): The Same APR Rate for All Loan Amounts

  • Borrowing amount: £5,000 – £25,000
  • Borrowing term: 1 – 5 years
  • Early repayment charges: None
  • Representative APR: 5.6%

Representative example: With a loan of £10,000 over 60 payments, your monthly repayments will cost you £181.04 at a representative 5.6% APR. The total loan cost with interest is £11,462.40. Credit available subject to status.

With AIB (NI) personal loans, you'll have the same fixed interest rate no matter how much money you borrow for your new car so that you can borrow between £5,000 and £25,00 at a 5.6% fixed APR. You can choose how long you take out the loan, from one to five years. You'll also have the flexibility to repay the loan early, partially or in full, without any extra charges.

If you're a new customer of AIB, you can only make an application over the phone. However, you can get a quick quotation via the online loan calculator. You can apply online via their banking app if you already bank with AIB. You'll receive a decision within three hours of completing your application.

To apply for an AIB (NI) loan, you must  be a UK resident over 18 and have a good credit score.

3. M&S Bank: Personalised Quotes Based on Your Credit History

  • Borrowing amount: £1,000 – £25,000
  • Borrowing term: 1 – 7 years
  • Early repayment charges:
  • Representative APR: 6.9% – 14.9%

Representative example: With a loan of £10,000 over 60 months, your monthly repayments will cost you £195.23 at a representative 6.6% APR. The total loan cost with interest is £11,713.80.Credit available subject to status. 

With M&S Bank car finance, you can choose the term of your loan, get a loan from as little as £1,000, and decide to make monthly payments within one to seven years. You can check how much your monthly repayments will be before you apply to help with your budgeting.

You can get personalised loan quotes that won't affect your credit score. There is no charge for overpayments. If you overpay your monthly repayments, you'll lower the interest you'll be paying on the overall loan. Additionally, you can defer payments for three months without arrangement or set-up fees.

To be eligible for an M&S Loan, you must have an annual income of at least £10,000, be a UK resident and age 18 or over. If you don't meet the lending criteria, you could still be allowed to take out a loan, but the loan and APR may differ depending on your circumstances.

4. Sainsbury's Bank: Better Deals for Nectar Members

  • Borrowing amount: Up to £25,000
  • Borrowing term: 1 – 7 years
  • Early repayment charges: Yes
  • Representative APR: From 5.7%

Representative example: With a loan of £10,000  over 60 months, your monthly repayments will cost you £191.71 at a representative 5.7% APR. The total loan cost with interest is £11,502.60. Credit available subject to status.

You can get a better Sainsbury's Bank car loan deal if you're a Nectar member. Nectar members can apply for a car loan of up to £40,000, whereas non-members can only get a car loan of up to £25,000. If you want a better deal on APR and lending options, you'll need to have had a Nectar card for at least six months before your application.

Depending on your loan value, you can pay back your loan over one to seven years with manageable fixed monthly instalments.

You can use the Sainsbury's Bank loan calculator to determine your repayments, potential interest rate and borrowing availability without harming your credit score. You may receive the money within 2 hours or one business day if accepted. If you're looking for a family car, you can apply for a joint loan with a member of your household.

To be eligible for a car loan, you'll need to be at least 18 years old and no older than 83 when the loan is due to be fully repaired, and you'll need to have an annual income of more than £7,500 per year.

5. Post Office: Instance Decision on Your Application

  • Borrowing amount: £1,000 – £40,000
  • Borrowing term: 1 – 7 years
  • Early repayment charges: Yes
  • Representative APR: From 5.8%

Representative example: With a loan of £10,000 over 5 years, your monthly repayments will cost you £191.71 at a representative 5.8% APR. The total loan cost with interest is £11,502.65. Credit available subject to status.

When you apply for a Post Office car loan, you may get an instant decision, and you could receive the money in your bank account the next working day. You can use their loan calculator to plan your monthly repayments before applying.

The interest rate shown in the calculator may differ from the one offered, as your credit rating and personal circumstances determine the loan amount, term, and interest rates. If you repay your loan early, you may face a charge of up to 58 days of interest.

To be eligible for a Post Office personal loan, you must be over 21 and no older than 70 at the end of your borrowing term. Additionally, you have to have been a UK resident for at least three years and have a UK-based bank. You need a regular annual income above £12,000 and a good credit score without a history of bankruptcy or Country Court judgments.

6. Tesco Bank: Up to 10 Years Fixed Term

  • Borrowing amount: £1,000 – £35,000
  • Borrowing term: 1 – 10 years
  • Early repayment charges: Yes
  • Representative APR: Up to 15.4%

Representative example: With a loan of £7,500 over 5 years, your monthly repayments will cost you £145.43 at a representative 6.3% APR. The total loan cost with interest is £8,725.80. Credit available subject to status.

With Tesco Bank, you can see how much your loan will cost you in the long run. Using the calculator, you can see how much APR you'll have to pay on your desired loan amount and how much your monthly repayments will be. You'll also be able to choose which day of the month you'll make your fixed monthly payment.

You can benefit from lower APR rates if you've got a Clubcard. Once accepted for the loan, you can take a two-month payment break if you're eligible at the beginning of your loan.

However, interest will accrue during the payment break, and your loan term will be extended by two months. There is an overall quick approval process; most applicants receive an instant decision. Joint loans are available if you want to buy a car with another person.

To be eligible for a loan from Tesco Bank, you must be between 18 and 74 and be employed or have a regular income like a pension. You also need to have lived in the UK for at least three years and have a UK personal current account.

7. Novuna Personal Finance: Pay Back Your Loan Early with No Charges

  • Borrowing amount: £1,000 – £35,000
  • Borrowing term: 2 – 7 years
  • Early repayment charges: No
  • Representative APR: From 7.4%

Representative example: With a loan of £7,500 over 5 years, your monthly repayments will cost you £149.09 at a representative 7.4% APR. The total loan cost with interest after is £8,945.40. Credit available subject to status.

With Novuna Personal Finance, you can choose the date of your payments after you've paid the first one. The minimum term time is longer than the other loans on the list. However, this lender allows you to pay your loan in full at any time without additional charges or fees.

There is a loan calculator that allows you to work out the loan amount and your interest rates. You can also look at your monthly budget with the calculator to determine which loan you can afford and which fits your other monthly purchases.

You can fill out your car loan application online within ten minutes, and you'll get an instant decision. Once you're accepted, you'll have the money in your bank account within two working days. You can borrow up to £35,000 and spread the cost from two to seven years.

To qualify for a loan from Novuna Personal Finance, you must be 21 or over and be a permanent UK resident for at least three years. Additionally, you need to be permanently paid, employed, self-employed, retired with a pension and have an income greater than £10,000. You'll also need a bank or building society account and have a good credit history.

Other Car Finance Options

Although personal loans are the most common type of car finance, there are other options you could consider.

The different types of car finance:

  • Hire purchase: a financial option that helps you buy a new or used car; you have to pay a deposit and then pay off the car's value in monthly payments. You don't own the vehicle with a hire purchase until the last payment, as the loan is secured against the car. There are no mileage limits with this car loan.
  • Personal contract purchase: allows you to rent a car until your contract ends. At the end of the term, it usually ranges between three to five years; you can return the car, pay the resale value and keep it or use it to buy a new car. With a personal contract purchase, you must pay a deposit upfront and are limited on mile usage. The idea is you make a series of smaller monthly payments, and then at the end of the agreement, you have to make a larger payment.
  • Logbook loans: a secured loan that allows you to transfer vehicle ownership to the logbook lender as security for a loan. You can keep using your vehicle if you repay the logbook loan.

Leading Car Finance: The Verdict

Whichever car finance option you use, ensure you can keep up with your monthly repayments.

Car finance can get expensive, so by making your payments on time and refraining from paying back your car loan early, you can avoid paying any extra charges.

Before you start looking further into car financing, here are a few extra tips to help you on your way to getting your new financed car:

  • Compare car loans: Look for the best car loan deals; don't just apply for the first deal you see. Compare car finance deals to work which is the best for your circumstances.
  • Consider car loan cost: By the time you've paid for the loan and the added interest, you may be better off saving to pay the car outright to save yourself money.
  • Car insurance: Not all car loans come with car insurance. Most don't, so you'll need to add car insurance to your budget on top of your monthly payments.
  • Interest rate: Each car loan will have a different interest rate. You should look for a loan that offers the lowest interest, so you're not paying a significant amount on top of the actual cost of the car. The longer your fixed loan term, the more interest you'll pay. Some loans allow you to make additional monthly payments to lower the amount of interest you have at the end of the loan.
  • Credit file: You may be rejected for car financing if you've got a poor credit history. If you do not need a new car urgently, consider improving your credit score to have more car finance opportunities.
  • Loans calculator: Always try the calculator before applying for a loan. Not only will you save your time finding out if you can afford the loan, but you'll also prevent any unnecessary marks on your credit report, thus not harming your credit score.
  • Early repayment fees: Most loan lenders charge you when you repay the loan early. You should always check in your contract how much the charge is. You may come into some money later in your fixed term and have the opportunity to pay off the remaining balance, but it's worth checking you won't end up paying more than you would if you carried out the term.

So, now you know all about car finance and how to keep on top of personal loans, you're one step closer to that new car you've been wanting.

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Mentioned Banks

About M&S Bank Marks & Spencer Financial Services PLC trades under the name M&S Bank. It is a UK-based retail bank, formed as the financial services arm of Marks &...
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Part of one of the world’s biggest supermarket chains, Tesco Finance was launched back in 1997. The Head Office is based in Edinburgh, and although there were bricks and mortar branches...
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About Havin Bank Havin Bank, formerly known as Havana International Bank, or HIB, was founded in the United Kingdom in 1972. It received its banking authorisation the following...
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