What is a personal loan and what to consider when using one to fund a car purchase
What is a personal loan?
An unsecured personal loan is a sum of money lent by a bank or other lender, which is then paid back over a pre-agreed period of time. However, as well as paying back the amount owed, you’ll also have to pay a certain amount of interest.
Using a personal loan to buy a car
Personal loans let you borrow an agreed sum, then repay it in fixed amounts each month, normally over a period of one to five years. Interest rates are variable and linked to how much you borrow. So a smaller loan will normally come with a higher interest rate than a larger loan would.
The interest rates that you see advertised are known as representative APRs. These are the rates that at least 51% of applicants will be eligible for.
Here’s an example of the kind of offer you could expect:
If a car costs £12,000 to buy outright, you pay a 10% deposit from your savings of £1,200, leaving £10,800 left to pay.
You're accepted for a personal loan, and borrow £10,800 over three years.
You get a 5% APR deal, meaning payments would be £323.69 a month (so £11,652.68 over the three years).
You drive away from the dealership in your new car, and start to make your monthly loan repayments.
So in total you’d pay £12,852.68
Once all your repayments have been made, you don’t need to do anything else as your agreement is finished.
Getting to know your options
There are lots of different ways to finance your car, so if you’d like to know more about what’s available visit our finance options pages.
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