Is It Cheaper to Get Car Finance or a Bank Loan?

Getting the best-value way to pay for your next car

For most UK drivers, the real question is not whether to finance a car, but how. The answer depends on your credit profile, cash flow, and how long you plan to keep the vehicle. If you have excellent credit, a personal loan from your bank can be the cheaper route overall. If your credit is fair or poor, dedicated car finance can deliver lower monthly payments and may cost less across the term than a high-APR loan. Understanding why those outcomes differ is what saves money.

Consider a typical example for excellent credit on a £15,655 car. A personal loan at around 5.8% APR could mean roughly £365 per month and a total cost of about £17,528. Compare that with hire purchase at 10.9% APR, where monthly payments might be near £400 and the total about £19,200. The bank loan comes out ahead on total cost and keeps you in control from day one.

Shift the lens to fair credit. On a £15,135 car, a personal loan at 23.9% APR can push monthly payments to roughly £474 and a total of £22,740. By contrast, car finance at 12.9% APR could be around £400 per month and £19,200 in total. Here, specialist car finance wins on affordability and overall spend.

PCP, HP, personal loan - each path solves different problems. PCP often delivers the lowest monthly payments because you only finance the expected depreciation and settle a balloon to own, hand the car back, or part exchange. HP is simpler: pay a deposit, clear fixed instalments, and own the car after the final payment. A bank loan is straightforward and often cheaper with top credit, and it makes you the legal owner from the start.

The cheapest option is the one that fits your credit profile, ownership plans, and cash flow - not just the lowest monthly number.

Remember that UK APRs in 2025-26 typically range from 6-9% for good credit and 10-19% for average or poor credit. Term length matters too. Personal loans can run up to 7 years, which lowers monthly outlay but increases total interest, while HP commonly tops out at 5 years. The right mix of APR and term is what balances affordability with long-term cost.

Who this guidance helps most

If you have good to excellent credit and want outright ownership from day one, a personal loan can be compelling. It removes deposit hurdles, widens your buying options to include private sellers, and allows free modification or resale later. If you have fair or poor credit, PCP or HP may secure more manageable monthly payments and a lower total cost than a high-APR personal loan. Budget-conscious drivers who prefer a newer car every 3 to 5 years often lean toward PCP for the flexibility to return or upgrade.

This guide is for UK residents weighing monthly affordability against overall value, especially if you are comparing dealer quotes with bank loan offers. It will help if you want to understand deposits, mileage limits, balloon payments, and the impact of term length on both your payments and your total interest.

Your main routes to the driver’s seat

1. Personal loan from a bank or lender - own the car outright from day one, no deposit required, flexible terms up to 7 years.

2. PCP car finance - lower monthly payments, balloon to own, or hand back at term end. Mileage limits apply.

3. HP car finance - deposit plus fixed monthly payments, own the car after the last instalment, typically no mileage limits.

What it really costs - and why it varies

Can you qualify - and what lenders look for

Affordability and credit profile set the tone. With excellent credit, personal loans often secure the lowest APR and total cost, and no deposit is needed. This helps if savings are tight and you want to negotiate as a cash buyer, including with private sellers. If your credit is fair or poor, car finance providers may price more competitively than bank loans, reducing monthly strain and sometimes the total cost. PCP can be especially accessible thanks to the lower monthly payments tied to depreciation rather than full value.

Expect lenders to review income stability, existing debts, and spending. HP usually requires a deposit and ends in ownership after the final payment. PCP will add mileage caps and condition standards, which suit many urban drivers but demand planning if you commute long distances. Personal loans lack usage restrictions and allow you to change, sell, or refinance the car when you wish.

Kandoo works with a panel of UK lenders, giving you a broader view of options against your credit profile. That means you can compare loan and finance routes side by side before you commit, aligning monthly costs with long-term value.

From quote to keys - a simple path

1. Check your credit score and set a realistic budget.

2. Get indicative quotes for loan, PCP, and HP.

3. Compare APR, total cost, term length, and fees.

4. Decide if you want ownership now or later.

5. Assess deposit needs and cash reserves.

6. Choose the option that fits your monthly comfort.

7. Finalise paperwork and confirm affordability checks.

8. Drive away and keep to your payment plan.

Trade-offs that matter

Read this before you sign

The cheapest monthly payment is not always the cheapest deal overall. PCP’s lower outlay works well if you plan to return or swap the car, but owning via the balloon can raise total costs versus a sharp personal loan. With bank loans, the lack of a deposit and instant ownership bring freedom, but extended terms can inflate total interest, and early repayment fees may apply. Car finance can also limit you to dealer stock and typically excludes private sellers, narrowing your bargaining power. Always match term to how long you intend to keep the car and factor maintenance, insurance, and road tax into affordability. If your credit is average or rebuilding, remember that a car finance offer may undercut a high-APR personal loan on both the monthly figure and the final tally.

Alternatives if your plan changes

1. Leasing or subscription - fixed payments, maintenance sometimes included, no ownership.

2. Salary sacrifice for EVs - potential tax advantages via your employer.

3. Save and pay cash - strongest negotiating position, no interest.

4. Credit union loan - community lenders may offer fairer rates.

5. Part exchange plus smaller finance - reduce borrowing and interest.

FAQs that cut through the jargon

Q: Which option is usually cheapest overall for excellent credit? A: A personal loan often wins on total cost. For example, around £17,528 versus £19,200 for comparable car finance on a similar car price.

Q: When is car finance cheaper than a bank loan? A: With fair or poor credit. A personal loan might sit near 23.9% APR, while car finance could be closer to 12.9% APR, reducing both the monthly and total cost.

Q: Does a personal loan need a deposit? A: No. That can help buyers without upfront cash and lets you negotiate as a cash buyer, including with private sellers.

Q: What is the main advantage of PCP? A: Lower monthly payments and end-of-term flexibility. You can pay the balloon to own, return the car, or part exchange into another deal.

Q: How do terms affect cost? A: Longer terms lower monthly payments but usually increase total interest. Personal loans can stretch to 7 years, while HP typically runs up to 5.

Q: Who owns the car during the agreement? A: With a personal loan, you own it immediately. With PCP and HP, the lender owns it until you settle the balloon or make the final payment.

Q: Are there restrictions with car finance? A: PCP has mileage and condition requirements. Many finance agreements limit modifications and restrict purchases to dealerships.

How Kandoo helps you choose well

Kandoo is a UK-based retail finance broker that compares personal loans and car finance options across a panel of lenders. We help you understand monthly payments, total costs, deposits, and eligibility so you can select the route that fits your credit profile and plans for the car. One simple application, expert guidance, and a clear view of your choices.

Next steps: check your credit, gather quotes, compare total costs, then apply with confidence through Kandoo.

Important information

This guide is for general information only and is not financial advice. APRs, eligibility, and terms vary by lender and your circumstances. Always read the agreement and consider independent advice if unsure. Credit is subject to status and affordability checks.