Secured car loans is a term used to describe either a loan secured by a vehicle or a secured loan used to buy a vehicle (car finance). We explain both of them here with your most frequently asked questions answered. 

Read on as we steer you through the details. 

What is a secured loan?

A secured loan is a type of loan that includes collateral within the credit agreement in case you do not keep up with monthly payments. There are different types of secured loans, from generic secured personal secured to loans for a specific purpose, such as a mortgage to buy a home or a secured home improvement loan to do as the name suggests. 

If you stop paying your loan back, the lender can seize the asset listed as collateral in the agreement and sell it. The money raised from the sale of the asset will be used to recover the total amount payable on the debt, including the principal loan amount, interest and late fees. Any leftover monies will be given back to the debtor to keep. 

Different assets may be allowed to be used as security with the credit agreement as collateral, but some of the most common are property, home equity and vehicles. Lenders will not repossess assets if you miss one payment, but repeated defaults and a lack of communication from you can result in the asset being repossessed and sold. 

You should only consider a secured loan from a lender that is authorised and regulated by the Financial Conduct Authority (FCA). 

Are secured loans easier to get?

When you secure a loan with an asset, the lender perceives you as less of a lending risk. It is much easier for them to recover the debt through seizing the asset, compared to an unsecured loan where they may have to chase you to the courts over a lengthy process. For this reason, it is considered somewhat easier to get a secured loan over unsecured loans. 

Choosing a secured loan is also beneficial if you have bad credit. A poor credit score that could stop you from getting unsecured loans may not be as big of an issue when applying for a secured loan. 

Can I get a secured loan against a car?

Some people choose to take out a secured loan and use their car as collateral. In these cases, the car will be repossessed if you do not pay back the loan as agreed. 

Do not confuse this situation with a secured car loan or car finance, which is the process of taking out a secured loan against a car that you are purchasing over many months. We discuss this type of car finance later in this guide. 

What happens if I don’t pay the loan secured against my car?

If you have a secured loan with your vehicle used as collateral and have missed a single payment, you’re likely to receive a notification from the lender asking you to pay. It’s important to engage with the lender early even if you cannot afford the monthly repayments anymore. Explain why you cannot afford it and they may renegotiate more affordable repayments with you.

If you ignore any correspondence and try to avoid the problem, the lender will start listing repayment defaults on your credit history. At this stage, it is increasingly likely that the lender will look to repossess your car and sell it to recover the debt. 

What is a secured car loan?

As opposed to a secured loan against a car, you might be able to take out a type of secured loan to buy a car, also known as car finance or car financing. 

You will buy the car over monthly repayments lasting many months or more likely years. These repayments consist of repayment on the money borrowed and a rate of interest. Many people choose to buy a new car through car finance to buy a better car than they can afford right now, by spreading out payments. 

Where can I find a secured car loan?

Secured car loans can be found at specific car loan lenders and vehicle financing companies. You may want to search for these independently or you can speak with the car salesperson about car financing companies that the dealership is partnered with. 

Can I get a secured loan on a car?

The ability to be approved for car finance depends on your personal circumstances and the lender’s affordability checks. This is an assessment of your regular income against existing debts along with the planned car finance repayments. A percentage of your income will need to cover all of your debts to make room for essential living expenses and to overall make repayments comfortable. 

Your credit score will need to be checked to see how you have managed debts in the past as well. A poor score could result in a refusal. All in all, it comes down to personal situations. You might be able to lower the loan total amount by trading in your existing vehicle. 

Secured car loan interest rates

But, what are the interest rates on secured car loans in the UK? The interest rate you are offered can vary based on personal finances, loan amount, repayment period and of course your credit rating. However, the average secured car loan representative rates are from around 3% to 10%. You may find some slightly cheaper and some loans considerably more expensive. 

What if I haven’t found a car yet?

Not every lender requires you to have found the car you want to buy before agreeing to a secured car loan. Some will allow you to agree to secured car loans in principle and then only take the loan out after you have found the car you wish to buy. 

This is similar to how a mortgage can be agreed upon. You can agree to a mortgage deal in principle before searching for property, so you only search for properties you can afford and don’t waste time. Once you find a property you want to buy, you can apply for the mortgage with confidence that you will be approved for the size of mortgage required. 

However, not all financing companies and lenders will offer this for secured car loans. 

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Are secured car loans easier to get?

If you are seeking credit to buy a new car, a secured car loan might be easier to be approved for compared to unsecured options. These loans can be more suitable in any case, especially if they allow you to trade in a used car to save money on the loan. 

Using an unsecured personal loan to buy a car could mean not securing as much credit and/or paying a higher interest rate for the amount you want to borrow. 

What if I have been refused elsewhere?

Lenders apply their own affordability assessments and determinations of your credit score. There is no fixed test that all lenders use. Therefore, if you have been rejected elsewhere, you could still get car finance from another company. But remember to only consider lenders that are authorised and regulated by the Financial Conduct Authority. 

What if I don’t pay my secured car loan?

If you cannot pay your secured loan to buy the car, the car can be returned to the car financing company under certain circumstances and you will not receive a refund on payments to date. If you’re behind on payments the company could still chase you for these once the vehicle is returned. 

They may ask you to drive it to a local dealership. But you may not be obligated to do so and they could have to collect it themselves from your home. It’s best to check your credit agreement for the specifics. 

More on secured car loans 

For more information on secured car loans and other types of secured loans, come back to us at MoneyNerd soon. 

We have just written and published scores of updated guides all about these types of loans and related subjects. Type your burning questions into our search bar to find a new guide that provides clear and relevant answers. 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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