If you’re planning to purchase a new or used car and need to borrow funds, a personal auto loan can provide the cash upfront, often allowing you to borrow more than you could with a 0% credit card. This guide explains how personal auto loans work, compares them to other car financing options, and lists the best loan rates available. For quick insights, use our Loans Eligibility Calculator to identify lenders most likely to approve your application.
Understanding Personal Auto Loans
Personal auto loans, also known as unsecured loans, involve borrowing a fixed amount from a lender and repaying it in monthly installments over a set period, typically one to seven years. Interest is charged based on factors like your credit score, loan amount, and loan term. The interest rate, expressed as the Annual Percentage Rate (APR), increases the total cost of borrowing, so it’s wise to borrow only what you need.
Our eligibility calculator can show you which loans you’re most likely to qualify for and whether you’ll get the advertised rate. For most lenders, the advertised rate is a representative APR, meaning at least 51% of successful applicants receive that rate, while others may be offered a higher rate depending on their credit profile.
Once approved, the loan amount is deposited into your bank account, allowing you to pay the car dealer directly and drive away as the vehicle’s owner. To enhance consumer protection, consider paying even a small amount (e.g., £1) toward the car using a credit card if the seller accepts it. This activates Section 75 protection (for purchases between £100 and £30,000), making the credit card provider jointly liable with the dealer if issues arise.
Loan Completion
After completing all repayments, the loan is marked as settled on your credit file, and you have no further obligations to the lender.
How Repayments Work
Here’s a breakdown of how personal auto loan repayments function:
Monthly Installments
Repayments are made in fixed monthly installments, with the amount determined by the loan size, interest rate, and term length. Longer terms reduce monthly payments but increase total interest paid.
Direct Debit Setup
To avoid missing payments, which can harm your credit score and incur fees, set up a Direct Debit for automatic repayments.
Interest Rates (APR)
The APR reflects the annual cost of borrowing, including interest and fees. Rates vary based on the lender, loan amount, and your creditworthiness. Check our Interest Rates Guide for more details.
Switching Loans
Mid-term, you might save on interest by switching to a lender offering a lower rate. However, factor in early repayment fees, which our loan calculator can help you evaluate.
Early Repayment
Paying off the loan early can save on interest, though it typically incurs a fee equivalent to one or two months’ APR. This is often less costly than continuing to pay interest over the remaining term, especially if you’re early in the loan period.
Boost Your Credit with MSE’s Credit Club
Join MSE’s Credit Club to access tools that enhance your credit profile, including:
- An Eligibility Rating combining your credit score, affordability, and market trends.
- A full credit report to understand your financial standing.
- Personalized odds for loan and credit card approvals.
Sign up today to improve your chances of securing favorable loan terms.
Where to Find Affordable Auto Loans
Loan rates vary by the amount borrowed, and the advertised representative APR may not be the rate you receive. Lenders assess your credit history, income, and other factors to determine your rate and eligibility. Below are the cheapest loan rates across different borrowing bands, though you should check eligibility before applying.
Loans Under £3,000
Loans under £3,000 often have higher interest rates. Interestingly, borrowing slightly more (e.g., £3,000 instead of £2,999) can sometimes result in a lower rate. For small amounts, consider a money transfer credit card if you can repay within 12 months.
Loans £1,000 – £1,999
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| Zopa via John Lewis Finance | 9.9% rep APR (1-7 years) | Check eligibility or apply direct |
| Santander | 13.5% rep APR | Check eligibility |
| M&S Bank | 14.9% rep APR (1-7 years) | Check eligibility |
Note: Representative rates; at least 51% of accepted applicants receive this rate.
Loans £2,000 – £2,999
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| Zopa via John Lewis Finance | 9.9% rep APR (1-7 years) | Check eligibility or apply direct |
| Santander | 13.5% rep APR | Check eligibility |
| M&S Bank | 14.9% rep APR (1-7 years) | Check eligibility |
Loans £3,000 – £4,999
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| Novuna Personal Finance | £3,000-£3,999: 9.9% rep APR (2-5 years) £4,000-£4,999: 9.7% rep APR (2-5 years) | Check eligibility |
| Tesco Bank | 9.8% rep APR | Check eligibility |
| M&S Bank | 9.9% rep APR (1-7 years) | Check eligibility |
Note: Tesco Bank loans are now managed by Barclays.
Loans £5,000 – £7,499
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| People’s Choice (Hastings) | £5,000-£6,999: 7% rep APR £7,000-£7,499: 6.5% rep APR | Check eligibility |
| Tesco Bank | 7% rep APR (Clubcard required) | Check eligibility |
| Santander | 7.1% rep APR | Check eligibility |
Loans £7,500 – £15,000
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| M&S Bank | 5.9% rep APR (1-7 years) | Check eligibility |
| TSB | 5.9% rep APR | Check eligibility |
| Tesco Bank | 5.9% rep APR (Clubcard required) | Check eligibility |
Loans £15,001 – £20,000
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| People’s Choice (Hastings) | 5.8% rep APR | Check eligibility |
| M&S Bank | 5.9% rep APR (1-7 years) | Check eligibility |
| TSB | 5.9% rep APR | Check eligibility |
Loans £20,001 – £25,000
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| TSB | 5.9% rep APR | Check eligibility |
| Santander | 6% rep APR | Check eligibility |
| Tesco Bank | 6% rep APR (Clubcard required) | Check eligibility |
Loans Over £25,000
Borrowing large amounts (up to £50,000) is a significant commitment, so ensure you can afford repayments. Check with your bank first, as existing customers may access better rates.
Existing Customer Loans
| Lender | Rate (1-5 Years) | Application |
|---|---|---|
| First Direct | £25,000-£30,000: 5.8% rep APR (1-8 years) £30,000-£50,000: 6.9% rep APR (1-8 years) | Apply |
| Nationwide | £25,000-£35,000: 6.9% rep APR £35,000-£50,000: 7.9% rep APR | Apply |
| NatWest/RBS/Ulster Bank | £25,000-£35,000: 7.7% rep APR (1-8 years) £35,000-£50,000: 8.7% rep APR | Apply |
| Bank of Scotland/Halifax/Lloyds | £25,000-£35,000: 7.8% rep APR £35,000-£50,000: 8.8% rep APR | Apply |
| Barclays | £25,000-£35,000: 7.8% rep APR £35,000-£50,000: 7.6% rep APR | Apply |
Open Market Loan
| Lender | Rate (1-5 Years) | Eligibility & Application |
|---|---|---|
| Tesco Bank | £25,000-£35,000: 7.4% rep APR (1-7 years, Clubcard required) | Check eligibility |
If these options don’t suit, consider combining smaller loans or remortgaging, though the latter extends the term and secures debt against your home.
Alternative Car Financing Options
Besides personal loans, there are several ways to finance a car purchase. The table below compares key features:
| Finance Type | Typical Length | Deposit Required | Car Ownership | Mileage Restrictions |
|---|---|---|---|---|
| Cash Savings | N/A | N/A | You | No |
| 0% Credit Card | Up to 23 months | No | You (must repay debt) | No |
| Personal Loan | 1-7 years | No | You (must repay debt) | No |
| Personal Contract Purchase (PCP) | 1-5 years | Yes | Finance company (unless balloon payment made) | Yes |
| Hire Purchase (HP) | 1-5 years | Yes | Finance company until final payment | No |
| Leasing/Personal Contract Hire (PCH) | 1-4 years | Yes | Finance company | Yes |
Choosing the Best Option
The right financing method depends on your goals, such as owning the car outright or minimizing monthly payments. Below are details on alternatives to personal loans:
- Cash Savings: The cheapest option, as there’s no interest. Ideal if you have sufficient savings.
- 0% Credit Card: Suitable for smaller purchases if the dealer accepts cards and you can secure a high enough limit.
- Hire Purchase (HP): Useful if you struggle to get a low-rate loan, but the lender owns the car until all payments are made.
- Personal Contract Purchase (PCP): Good for those who want a new car every few years, though it’s often more expensive overall.
- Leasing/Personal Contract Hire (PCH): Offers low monthly payments but no ownership option.
Pros and Cons of Personal Auto Loans
Pros
- Immediate Ownership: You own the car outright, allowing freedom to drive and modify it without restrictions.
- Flexible Repayment Terms: Choose a term that fits your budget, balancing monthly payments and total interest.
- Access to Better Vehicles: Loans enable purchasing newer, more reliable cars with warranties or customization options.
- Credit Score Improvement: Timely repayments can boost your credit score, aiding future borrowing.
Cons
- Interest Costs: Interest increases the total cost, especially with longer terms.
- Financial Commitment: Monthly payments tie up income, and unexpected challenges may strain your budget.
- Credit Score Requirement: A poor credit score may lead to higher rates or rejection.
- Repossession Risk: Missing payments could lead to car repossession and credit score damage.
- Upgrading Challenges: If you prefer frequent car upgrades, PCP might be better.
Before borrowing, assess your finances, compare loan terms, and consider alternatives to ensure the decision aligns with your goals.
Reasons for Loan Rejection
You may be rejected for a personal auto loan if:
- Your credit score or history indicates a high risk of default.
- You have significant existing debt or unstable income.
- Your application contains incomplete or inaccurate information.
- You’re borrowing beyond your means or don’t meet the lender’s criteria.
Check our Credit Scores Guide for tips on improving your creditworthiness.
Personal Loan vs. Car Finance
Personal Auto Loan
- Pros: Immediate ownership, no mileage restrictions, and the ability to shop for the best rates.
- Cons: Higher monthly payments and full exposure to the car’s depreciation.
Car Finance (HP, PCP, Leasing)
- Pros: Lower monthly payments and potential access to newer cars.
- Cons: Higher overall costs, possible mileage limits, and delayed or no ownership.
Choose a personal loan if ownership and flexibility are priorities, or car finance if lower payments and frequent upgrades are preferred.
Additional Car Ownership Costs
Beyond loan repayments, consider these costs:
- Fuel/Charging: Average annual costs are £1,225 (petrol) or £1,572 (diesel), with electric vehicle tariffs potentially cheaper.
- Insurance: Third-party insurance is legally required, with average premiums around £900/year. Use our Compare+ Car Insurance tool to find affordable policies.
- MOT and Servicing: MOT tests cost up to £54.85, with servicing and repairs adding to expenses.
- Maintenance: Includes replacing tyres, batteries, and wiper blades, with costs varying by issue.
- Road Tax: Varies by car age, engine size, and emissions. Some vehicles are exempt.
- Other Costs: Parking, tolls, and congestion charges.
Further Resources
For alternative financing options, explore:
- Personal Contract Purchase
- Hire Purchase
- Car Leasing
Check our Motoring MoneySaving Guide for tips on reducing driving costs while staying safe and legal.
