Personal finance is a complicated area – and it’s sometimes difficult to understand the differences between the enormous range of finance products that are on the market at any one time.
Since lots of Car.co.uk customers ask whether or not car finance is a personal loan, we’ve explored the subject in a little more detail here.
Different types of car loan
Generally, the reason people want to know whether a car finance agreement is considered a loan comes down to how banks and other finance organisations consider their financial health.
When a finance product is ‘secured’ against something (often a house, a car, or another large purchase), it’s considered to be less of a risk than a product that has no security.
Well, it’s all about how likely the bank or finance company are to get back what’s owed to them if repayments stop for any reason. For instance, if you lost your job and could no longer pay a secured car loan, then the finance company would look at recovering the car, selling it, and settling the outstanding debt that way. On the other hand, if you used a personal loan to buy the car, the finance company would have to explore debt recovery routes or set up a repayment plan with terms less favourable to them to get as much money back as possible.
So clearly, the risk involved with a personal loan is greater. What’s more, a personal loan could have some element of the overall repayment amount written off altogether if someone runs into financial problems and explores insolvency proceedings – like an Individual Voluntary Agreement (IVA).
Different lines of credit
Since different types of finance product come with different levels of risk, banks will generally limit the amount you can borrow using each product. For instance, you might have no problem getting a mortgage for £100,000 – but getting a personal loan for the same amount is likely to be much more difficult.
The limits that are decided will depend on your personal circumstances – but secured products tend to have higher limits, as the risk is lower.
Is a car loan a secured loan?
Whether or not your car loan is a secured loan will depend on the product you’ve picked in the first place.
Many types of car finance are secured, including:
- Personal contract purchases – also known as ‘PCP’ or ‘personal contract plans’
- Hire purchase plans – also known as ‘HP’
- Personal contract hire – also called ‘contract lease’ plans
- Logbook loans – generally not a way of purchasing a car, instead, usually a smaller loan that’s secured against your vehicle
With these products, falling into arrears may lead to your car being recovered by the finance company and sold to recoup their losses.
On the other hand, if you’ve opted for a personal loan, you’ll find these are not usually secured against your vehicle. Since lenders will consider there to be an upper amount you can borrow as a personal loan, this often means your borrowing power is limited if you need further personal loans – but it does mean you’ve got a lot more flexibility when picking a car.
Personal loans offer greater flexibility because the finance company will not be relying on your car to get their money back should you run into problems. As such, personal loans are often a better choice if you’re looking at buying an older car, a classic, or an imported vehicle.