What's the difference between car loans and car finance?

There are two main types of lending available when you haven't got enough capital of your own to buy a car outright, these are:

• Car Loans
• Car Finance

Car Loans are offered by banks and general finance companies and are similar to other types of simple loans. With a car loan you can use the lump sum you've borrowed to pay for the car in full and take immediate possession of it. You then repay the loan back to the lender as agreed. Because you have paid for the car in full you legally own it so you can do what you want with it including selling it on. The table below outlines the types of lending that can be used to do this:

Type of loan	Things to think about...
Credit Card	Depending on the credit limit you have been approved, use it to either pay a deposit or the full purchase price. Can be an expensive option if you are not able to repay the credit card balance quickly.
Mortgage Top Up (or re-mortgage)	Not all Lenders allow mortgage top ups to be used for car purchases.
Personal Car Loan (unsecured)	These are short term loans usually 5 to 10 years with limited borrowing amounts.
Personal Car Loan (secured)	Your car (or home) could be repossessed if the loan repayments are not made on time.

Car loans can work out cheaper overall than other car financing options.

Car Finance agreements are a contract to pay regular monthly amounts to a car finance company either directly to them, or through a car dealership or manufacturer, to have the use (hire) of a car as if it was yours, for a fixed amount of time (finance term), usually between 12 months and 3 to 5 years.

The main difference with Car Finance is that although the car is in your possession, you do not legally own it, the dealer or manufacturer still has legal 'title' over it for the duration of the finance agreement.

Car Finance agreements are offered by car manufacturers, car dealerships, car finance companies and car finance brokers, the most common types of agreements are outlined in the table below:

Type of finance	Things to think about...
Hire Purchase (HP) (also known as Conditional Sale Agreement)	A deposit is paid to take possession of the car and the remainder of the purchase price is repaid by fixed installments over a fixed period. Legal ownership of the car transfers to you when the final instalment is paid. You may be limited to buying your car from a specific manufacturer or dealership.
Personal Contract Purchase (PCP)	A car is leased for a set period at a fixed monthly cost, at the end of the contract you have the option to either: buy it outright - the final amount you pay is agreed at the beginning of the contract and is called the MGFV (Minimum Guaranteed Final Value) or Balloon payment. return it with nothing further to pay. You must meet the agreed conditions, for example only use a certain number of miles per year. Monthly repayments may be lower but overall can cost more than HP.
Personal Contract Hire (PCH)	Companies or individuals can hire a car for a lengthy period of time at a fixed cost. The monthly rental and the terms and conditions such as total miles travelled, car maintenance and servicing are agreed up front. This option allows you have the use of a car without the additional costs of repairs and servicing.

Download the Car Loans PDF Guide here - see our other free PDF guides here

What are car loans?
What do you need for new or used car loans?
What's the difference between car loans and car finance?
Things to think about when considering new or used car loans
Applying through a car lender or car finance company
Car Loan FAQs - eg. bad credit car loan
More helpful car loan links

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