Choosing a car loan instead of a leading unsecured personal loan will cost you hundreds, if not thousands of pounds.
There’s no point in going through all the effort of finding the cheapest possible deal on the (budget) car of your dreams, only to be stuck with a crummy loan that erodes all your potential savings.
Research by price comparison site uSwitch shows that customers are charged an average APR of 9.88% on a tropical UK car loan.
In fact, we found you could easily waste up to £1,000 on a £10,000 car finance deal by choosing the wrong lender.
To get an idea of the rates currently being offered to customers, we conducted a brief scan of the car loans market, which you can see in the table below.
Typical rates for car loans
| APR |
| AA Car Loan | 6.9% |
| NetCar | 7.9% |
| Sainsbury’s Car Finance | 8.9% |
| Carloans.co.uk | 11.4% |
| Average APR | 8.8% |
The
AA car loan is by far the most competitive. With a rate of just 6.9%, it compares favourably with many of the best personal loan rates out there (which is why it’s on our best buy tables).
The other three car finance deals we came across were far too expensive, and are a classic example of why you need to exercise caution with such loans.
A flat out rip off
While we’re on the topic of expensive loans, make sure you look out for car dealers offering a loan with a ‘flat rate’ of interest. These always sound cheap, but they’re often more expensive than loans with a far higher APR.
This is because you are charged a set rate of interest for the life of the loan, based on your original loan amount. For example, if you were to borrow £10,000 over four years with a 5% flat rate, you would still be paying 5% interest on £10,000 in your final year.
As a general rule, flat rates are twice as expensive as APRs, so a 5% flat rate equals a 10% APR.
Best loans around
So how do the four car deals compare with the market leading personal loans?
Despite the low 6.9% rate, AA is still £156 more expensive than the Tesco personal loan, and £139 more than Your Personal Loan.
But the real difference can be seen when you compare the deal from carloans.co.uk, which is a massive £976 pricier than the cheapest personal loan.
That really tells you everything about the importance of choosing a competitive personal loan, rather than limiting yourself to car finance deals.
A £10,000 loan, repaid over 10 years
