Loan Secured on Car: What You Need To Know

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.

What Is a Secured Car Loan (Logbook Loan)?

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.

How Do Secured Car Loans Work?

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.

How Much Can I Borrow Against My Car?

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.

What Are The Requirements For a Logbook Loan?

Although the eligibility requirements vary from lender to lender, most loan providers that offer car secured loans require applicants to:

• Be over 18 years old.
• Be a UK citizen.
• Be the registered keeper of the vehicle.
• Have no outstanding car finances.
• Have a valid MOT.
• Have car insurance.

The car has to be roadworthy and in a good drivable condition to qualify for a secured loan.

You’ll also have to provide:

• A spare key.
• Photo ID (passport or driving licence).
• Proof of address from a bank statement or utility bill.
• Documents that show your regular income.

What Are The Risks of Secured Loans on a Car?

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.

• You could lose your car: The lender can repossess your vehicle if you default on the loan.

• Your credit score may suffer: Failing to keep up with your payment plan can incur late fines and plummet your credit rating.

• Secured loan providers aren’t heavily regulated: They are generally riskier than car finance agreements like Hire Purchase and Personal Contract Purchase.

• You could end up paying a high-interest rate: If you have a less-than-perfect credit score, you will have a better chance of qualifying for a loan, but you’ll still pay a higher interest rate.

Things To Consider When Taking Out a Logbook Loan

Before opting for loans secured against your car, here are the things you should consider:

Your vehicle’s worth

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 Annual Percentage Rate (APR)

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.

You must be the vehicle’s legal owner

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. 

Look out for hidden fees and costs

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.

Most lenders use Direct Debit 

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.

What Happens If You Can’t Pay Your Logbook Loan?

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.

Logbook Loans Alternatives

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:

• Homeowner loans are a type of secured loan where you use your house as collateral. They carry the same risks as other secured loans, but you would be able to borrow a large amount of money if you have enough equity in your property.

• Credit cards are a better solution for borrowers that need smaller sums, though you’ll need to ensure that you pay back what you owe on time to avoid high-interest rates.

• Unsecured or personal loans are the next best things for borrowers that don’t want to risk losing their assets. The downside is you’ll need to have a good credit score to qualify, though there are some lenders that offer loans for people with bad credit.

• Guarantor loans are a good option for people with a poor credit history who have a family member or a friend with a better credit score that’s willing to act as a guarantor. You can read our guide to see what you’ll need to apply for a car guarantor loan.

• Debt consolidation loans are designed for people that have several debts. They allow you to consolidate all of your debt into one monthly repayment, which can simplify your repayment plan. If you’re looking for good offers, here’s our list of the best debt consolidation loans for 2022 (so far).

• Vehicle equity release allows you to get access to cash by leveraging the equity you have in your vehicle. This usually involves selling your car to a dealership and buying it back through a Hire Purchase (HP) agreement.

• Budgeting loans are available to people who are on benefits. They’re small interest-free loans funded through the Social Fund.

Bottom Line 

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.