How do car loans work?

If you’re looking to buy a new car, you might be considering a car loan. With a car loan you borrow the money upfront and once you use it to pay for your car, you’ll own it outright. In this guide, we’ll cover what car loans are, how the process works and the different types to consider.

At Asda Money, our panel of lenders provide car loans up to £25,000 across one to seven years.

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Car loans glossary


Here are a few terms you’ll need to get your head around:

  • APR: This means Annual Percentage Rate (APR) and is the additional amount you’ll pay back on top of the loan. It covers interest rates and charges.
  • Car loan: A personal loan you take out with a lender that you can use to buy a car or make a payment towards a car.
  • Car finance: A catch-all term for the different types of finance agreements available to buy a car. The two main are Hire Purchase (HP) and Personal Contract Purchase (PCP).
  • Interest rate: The rate of interest you’re charged on top of the loan, as a percentage of the loan amount. Your monthly repayments cover both the principal and the interest.
  • Loan term: The length of the car loan.
  • Monthly repayments: The amount you pay back each month covering the amount borrowed and interest.
  • Principal: The amount you borrow as your car loan.
  • Total repayable: The final balance you owe, including the loan, interest, fees and any other payments.

Top FAQs:

What’s the difference between car finance and a loan?

With a car loan, you’ll take out a personal loan with a lender that you’ll then use to buy a car. Car finance is typically offered at a dealership at the time of buying the car. It is generally either:


  • Hire Purchase (HP): You usually pay a 10% deposit and make monthly repayments towards the cost of the car. Once the final payment is made, you own the car.
  • Personal Contract Purchase (PCP): You put down a deposit and make fixed monthly payments until the contact ends (usually for three to five years). Once the contract is up, you have the option to make a ‘balloon payment’ to buy the car outright. PCP is usually the only option for higher value cars (over £10,000). Often PCP has lower monthly payments and gives you more choice at the end of the contract – buy, trade it in or start a new PCP deal on a different car.


The biggest difference between car finance and a car loan is the fact you own the car straightaway with a car loan. This means you’re not constrained by mileage limits and you’re free to make any modifications to your car.

Car loans step by step

The car loan process works like this:

  • Choose the car you want to buy from a dealership or second-hand seller.
  • Calculate how much you need to borrow. If you have some money to put towards the purchase yourself, subtract this from the cost of the car. This gives you the total you need.
  • Select the length of your loan term. This determines how long you have to repay the loan and what your monthly repayments will be. Our car loan calculator helps you understand how the length of a loan affects your monthly repayments.
  • Run an initial eligibility check with Asda Money to check the potential loan deals from our panel of lenders.
  • Select the deal that best meets your needs and apply directly with the lender.
  • If you’re accepted, you’ll get the money in a few days.
  • Once you have the funds you can buy your car.
  • You’ll then need to keep up with your monthly repayments.
Advantages of car loans
  • Access to money: When you’re approved for a personal car loan you will likely get the money within a few days. This means you can pay for your car quickly.
  • Own the car outright: As soon as you borrow the money and buy your car, you will own it outright. Your monthly repayments go towards paying the loan off, not the car.
  • Increase your buying power: If you already have some money to put towards your car, you can increase your budget with a car loan and buy your preferred vehicle.
  • Flexible repayments: With a car loan, you can choose how long you need to pay back the loan. Terms range from one year to seven years. Remember it you choose a longer term, you will pay more in interest over the course of your loan.
  • Boost your credit score: If you continue to meet your monthly repayments, having a car loan can help build your credit score.
What info do I need when applying for a car loan?

When you apply for a car loan you’ll need to provide:

  • Personal information: To assess your application and conduct a credit search.
  • Financial information: Most of this can be accessed through Open Banking, but you may be asked for information relating to your income and outgoings. This is so the lender can assess affordability.
What factors affect car loan eligibility?

Your eligibility for a car loan will depend on:

  • Your credit score: If you have a strong credit score, lenders may be more wiling to lend to you and will likely offer better interest rates.
  • Your income: Lenders will look at your income to assess whether or not you’ll be able to afford the monthly repayments.
  • Your recent borrowing history: If you’ve recently taken out another loan or borrowed substantial sums, lenders will take this into account.
What determines the monthly payment on a car loan?

When you take out a car loan, the monthly repayments are determined by the amount borrowed and the interest rate:

  • Amount borrowed (principal): Say you borrow £10,000 as a car loan, you will need to pay back the full amount over the term of the loan via your monthly repayments.
  • Interest: The interest rate is a percentage of the total amount borrowed and must be paid on top of the principal.


Both of these are calculated then divided into your monthly repayments. The interest you pay each month on a car loan is based on the current balance of the loan at that time. When you first start paying it off and your balance is higher, you pay more interest. As you chip away at the total and pay the balance off over time, the interest portion of your monthly payment reduces.

Types of car loans

The car loan you choose will often depend on the type of car you’re buying.

New car loans

A new car loan is where you borrow money from a lender to buy a new car. The amount you borrow depends on the cost of the car. At Asda Money, our lenders offer loans up to £25,000 which can be used to buy a new car outright or to put towards the cost of a new car.

Used car loans

A used car loan is used to buy a second-hand car from a dealership or an individual. Again you can borrow up to £25,000 as a used car loan from one of our lenders.

Car refinancing loans

A car refinancing loan is where you already have car finance – whether a car loan, hire purchase agreement (HP) or personal contract purchase agreement (PCP) – and you take out a new loan to pay off your current finance agreement. It helps you make any ‘balloon payments’ at the end of your deal so you can own your car outright. You may secure better interest rates with a car refinance loan too.

0% car loans

You may see some lenders offering 0% car loans. You will usually get a deal where you pay no interest for a certain period of time, but you will pay interest after this.

What’s the difference between secured and unsecured car loans?

To borrow with a secured car loan, lenders need security in the form of an asset – this is usually your home. If you don’t meet the monthly repayments, your home can be repossessed. Unsecured car loans don’t have this type of security.

Unsecured personal loans (available through Asda Money)

  • Usually a small, fixed rate loan for between £1,000 and £25,000
  • The amount you borrow and the rate you see is based on things like your personal circumstances and credit score

Secured personal loans also known as homeowner loans  (not available through Asda Money)

  • Typically sums over £15,000 and repaid over longer periods of 5-25 years
  • What you can borrow and the interest rate depends on your credit history, your assets and personal circumstances
Can I get a car loan with bad credit?

If you’ve had problems borrowing money in the past or issues with debt, you may have poor credit. It’s still possible to get a car loan with bad credit, although lenders may not offer you the best interest rates and you might not be able to borrow the amount you want. Other options like HP or PCP may be more suitable and have better interest rates if you have poor credit.

We’re here to help


At Asda Money, we can help you find the right car loan for you, through our carefully selected panel of trusted UK lenders.

With one eligibility check, you can compare loan offers from across our lender panel. We can also help you understand how to better manage your finances with the Financial Support at Asda Money. And we can help with your car insurance too.

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