Bank Loan Vs Car Finance: Pros and Cons

When it comes to financing your car, there are many different things to consider, from rates, APR and what you can get for your money. But, of course, that’s all before you have to think about fuel economy, trim and passenger capacity! Ultimately, there are two main options to choose from: a bank loan or specific car finance. Depending on your personal set of circumstances, there are pros and cons to each that can save you both time and money. 

Not sure where to begin? Read on to get all the facts you need:

Banks: A story of trust

As the keepers of all your hard-earned cash, banks certainly know a thing or two about managing money. When it comes to financing a car through your bank, you can generally expect to be preapproved for your loan before setting foot in a dealership, either online or in a branch. Once you have received your quote from the lender, the bank will issue a letter of commitment for you to present at the dealership. Less time is spent finalising your contract with the salesperson as a result. As a bonus, the salesperson will have less legroom to pressure you into buying all the unnecessary add-ons as your loan has already been preapproved on paper. 

One stumbling block you may encounter with a bank loan is that they may require you to provide information about the vehicle you wish to purchase before approving your loan. This, of course, is no issue if you know precisely what make and model you want, but not as flexible as a car finance deal. 

Bank Loan Pros

• True interest rates without any markups
• Less pressure at the dealership as your letter of commitment includes your pre-approved, fixed loan amount
• Lower interest rates for new or newer vehicles
• There may be credit card options available to add extra protection to your purchase

Bank Loan Cons

• Less flexibility – you may have to provide details of the car you want before approval
• Options are variable depending on the age/mileage of the car you want
• Dealerships run a hard search on your credit report before approving your application
• Approval can take longer

Getting on board with car finance 

We are living in a digital age. With it, you have an almost untapped resource giving you the most competitive finance rates with a few small clicks.

You could use a resource like this invoice price calculator to make sure that the monthly payments for your car finance will fit within your budget. It’s really handy to help work out your budget and what you can realistically afford. So whether you are applying for the first time, have plenty of experience, or need a bad credit car loan, there is a specialist lender out there that can cater to most individual circumstances. Finding the right lender often takes some time because every person has a different financial history. Many people start by looking for the best car finance rates to see what fits their monthly income. Brokers can help with this process by comparing different lenders for you. This way, you get a clear idea of your borrowing power before you visit a dealership. It makes the whole experience much less stressful when you know the numbers are already sorted. Unlike a personal loan from the bank, car financing comes in several varieties, from hire purchase to leasing. To give you a better idea of what car financing entails, we’ve broken down the three main types below:

Personal Contract Purchase (PCP)

Simple and incredibly straightforward, there’s a reason why PCP is the most popular type of car financing. Like most significant purchases, you are typically expected to place a 10% lump deposit on your chosen car. After that, the rest is paid off in low fixed monthly instalments. Then, when you have made your final payment, the vehicle is yours outright. During your credit agreement, you can’t sell the vehicle privately or return it to the seller. However, with all the bonus warranty protection and servicing thrown in as part of the price, there’s a lot of freedom within a PCP loan. Towards the end of your contract, you can pay a final lump sum or “balloon” payment to speed up the repayment process. 

Hire Purchase (HP)

Perfect for those that don’t want a loan secured against their assets, a hire purchase loan is secured against the vehicle instead. You can expect to pay a lump sum deposit of 10% before making your monthly, fixed repayments. Unlike PCP, you can sell the car during your contract as long as you have the lenders permission first or you have settled your final balance. With the added benefits of warranty protection and servicing included, an HP loan is an excellent way to stay on top of your budget. 

Contract Hire

Perhaps the most flexible loan available, contract hire is great for those that like to switch their vehicle up regularly. Your only limitations are based on your length of contract, agreed mileage limits and make and model. A contract hire loans biggest selling point is that you get a broad selection of cars without the responsibility of ownership. As long as you are happy to pay up to three months rental upfront to secure your vehicle, this is one of the most low maintenance financing options around. With servicing thrown in for free and low monthly repayments, there’s a lot to like. 

The pros and cons of car financing

Unlike a bank loan, there is more flexibility and options for purchasing a car through car finance. With 0% financing deals available and a more competitive market, there is a lot to celebrate. 

Pros of car financing 

• Widest choice of vehicles: models, makes and more
• Extra benefits such as warranty protection and servicing included
• Flexible repayment options
• More competitive market to find you the best rate
• Options available for bad credit customers

Cons of car financing 

• More likely to have pressure from a salesperson for unnecessary add-ons
• Strict terms and conditions such as mileage allowance
• Changeable APR rates from lenders

Our verdict

Your shopping experience is a very personal thing. You may thrive in a face to face situation on the forecourt, or you may prefer to do everything online. However, when it comes to buying a car, you want simplicity, and that’s where car financing triumphs. Not only do you get more variety and payment options, but more doors are open to you in terms of vehicle choices too. For instance, you don’t need to have made up your mind before approval – that can all come later. 

Bank loans and personal loans invariably still have their perks. From giving you true rates without any hidden markups to reducing pressure during the sales process, there is a lot to like. The only snag is the potential waiting time. You may have to have made up your mind before approval, whereas car financing reigns in its more flexible approach. 

Ready to buy your new set of wheels? With a range of financing options available, personal preference is a factor. But with the motoring world at your fingertips, which will you choose?