Written by, Marija Petkova
Updated September, 21, 2022
If you’re tapped out on finances or looking to get a better interest rate, you may be mulling over the idea of getting a loan secured on your car.
But is it worth the risk?
In this article, we’ll explain how secured car loans work, how much you can borrow with this type of loan, and some alternatives.
Let’s dive in.
A secured loan is a type of loan that requires putting up something of value as collateral.
In the case of a car secured loan, also known as a logbook loan, you borrow money against your vehicle. It doesn’t necessarily have to be a car– you can use your van or a motorbike as security in the loan agreement.
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When applying for a secured loan against a car, the lender will ask you to provide your vehicle’s logbook( V5) and/or the vehicle’s registration documents.
They will then ask you to sign a credit agreement, as well as what’s known as a ‘bill of sale’. This is a legal document that transfers ownership to the lender for the duration of the loan term or until you pay the loan in full.
Despite giving up ownership as part of the agreement, you will still be able to use the vehicle as before. However, if you have a loan secured by your car and you default on the loan, the lender can repossess it and sell it to make up for their losses.
When taking out a loan that is secured against your car, the borrowing amount depends on the vehicle’s value. Normally, you could borrow up to 70% of the vehicle’s price.
Like with other types of loans, you could pay off the debt before the end of the loan term, however, you’ll be subjected to paying an early repayment fee.
According to the Financial Conduct Authority (FCA), the average APR for secured loans against a car is around 400% or more.
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Although the eligibility requirements vary from lender to lender, most loan providers that offer car secured loans require applicants to:
The car has to be roadworthy and in a good drivable condition to qualify for a secured loan.
You’ll also have to provide:
Secured loans on a car are an excellent option if you want to get a good interest rate or improve your chances of qualifying for a loan with adverse credit.
But, they carry some risks too.
Before opting for loans secured against your car, here are the things you should consider:
The amount of money you could borrow directly depends on your vehicle’s worth. If your car is old, you might not be able to borrow the amount you need.
The APR on a loan can either be fixed or variable.
If you opt for a variable interest, you need to make sure that you can afford the monthly repayments, even if the interest increases over time. With a fixed interest rate, you will know exactly how much you’ll need to pay each month, but you’ll miss out on lower interest rates if they drop significantly.
To qualify for a secured loan on a car, you must be the legal owner and the registered keeper of the vehicle. That means you won’t be able to get a loan if you have outstanding car finances.
Some secured loans come with expensive arrangement fees and additional charges. When working out how much the loan is going to cost you, you’ll need to factor in the additional fees too. Keep in mind that all costs have to be listed in the contract, and you can dispute those that aren’t.
The majority of lenders prefer Direct Debits for regular payment because they permit them to take money from your bank account at regular intervals (weekly or monthly). If you can’t use a Direct Debit, you’ll need to ask the lender whether they accept other forms of payment.
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If you miss a payment, your lender will reach out to you to remind you that you need to pay your monthly instalments. They have the right to report your missed payments (also called delinquencies) to the credit bureaus, which will affect your credit score.
If you’re delinquent for more than six months, your lender can and will declare your loan as default.
You’ll be given a default notice and 14 days to respond, after which your lender will repossess your vehicle and sell it. They might add extra charges to your debt for falling behind on your repayments and removing the vehicle.
Defaulting on a loan could also trigger legal action, but it’s rarely necessary with secured loans.
If you’re struggling to repay the loan, the best course of action is to contact your lender and inform them of your situation. In most cases, they would be willing to discuss a payment plan you can afford.
If you can’t take out loans secured on your car or find a good deal, you might find some of the following options a better fit:
Loans secured on your car are types of loans that let you borrow money against your vehicle. To qualify for one, you’ll have to be the legal owner of the vehicle, and you won’t be able to borrow more than 70% of your vehicle’s worth, regardless of your credit score.
The biggest risk when taking out a car loan that’s secured is that your lender can repossess it if you can’t keep up with the payments.
It’s another word for collateral. It means that if you default on your loan, your lender will repossess and sell the vehicle to cover their losses.
You can get a loan secured on your car if you’re the legal owner of the vehicle. If your car is on finance, you’ll first have to pay the settlement figure to get full ownership before you can apply for a secured car loan.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.