Loans against cars are secured loans where your car is considered collateral. They will help you access money despite a bad credit score. While they let you access funds without further ado, they come with high interest rates. Collateral does not offset the impact of a bad credit rating and therefore lenders will not offer you the most affordable deals.
As your car is secured, there is a risk of repossession in case of default. At the time of using these loans, you should carefully ensure that you can repay the debt. Non-repayment will lead to car repossession and credit score damage.
If you tend to borrow money, consider using personal loans. They are unsecured loans and therefore there is no risk of losing your personal assets in case of default. However, they tend to damage your credit score as well if you fail to repay on time.
Interest rates for personal loans are also quite high because lenders can turn to your personal assets in case of default. Loans against cars in the UK might also come with high interest rates, but they are generally lower than personal loan rates.
Pros of loans against car in the UK
Here are the upsides of loans against car in the UK:
Quick access to cash
A significant benefit of loans against cars in the UK is that they enable you to access cash quickly. Even if your credit score is not up to scratch, you can easily secure funds. your car serves the purpose of collateral, which means you will continue to use your car the way you want, but the lender has the right to repossess your car in case of default.
Loans for cars can be a good solution only when you need money urgently and you are unable to secure personal loans. It depends on the loan amount how long it will take to complete the process. Normally, loans secured by a car takes 24 to 48 business days. Once the application is approved, you will receive funds in your bank account.
Flexible borrowing
You can borrow based on the value of your car. Of course, you will secure larger funds if the market value of your car is higher. However, lenders will carefully evaluate your vehicle condition before letting you know the loan size.
Bear in mind that a car is a depreciating asset. Lenders might not be able to lend equivalent to the current market value of your car, because in case of default they will unlikely recover the actual cost of the debt.
Available to those with poor credit
Your bad credit rating will not preclude you from taking out a loan if you secure it against your car. Just because loans are available to those with poor credit, it doesn’t mean borrowers across all credit score ranges are accepted. You should carefully identify that the lender you are applying to accepts your credit score. Otherwise, they will reject your application, and unfortunately, the impact of hard inquiries will continue to remain on your credit report for two years.
If your credit score is not stellar, you should try to fix it. Credit score improvement techniques are as follows:
• You should try to pay off your short-term high-cost debts fast.
• Do not carry credit card balance every month. Pay it off in full.
• Keep your debt-to-income ratio lower than 25%.
These methods can help improve your credit score. However, instant improvement is not guaranteed.
Structured repayments
Another benefit is that loans against cars come with structured repayments. These secured loans will require you to repay the debt in fixed instalments. You can easily make your budget around these payments.
Here are the downsides of loans against cars in the UK:
• The risk of repossession
The biggest drawback is that your car is at a risk of repossession if you fail to repay the debt. The lender will repossess your car if you do not settle the debt.
• High interest rates
Despite being a secured loan, they charge high interest rates. There is no guarantee that your lender will be able to offer you better interest rates. Monthly payments will be large and it can be difficult to keep up with them along with other essential expenses. Further, if you choose a longer repayment term to reduce the size of monthly repayments, you will end up paying a lot more money on interest overall.
• Limited borrowing capacity
Loans that are secured against cars might not be able to offer you larger sum because a car is a depreciating asset. Collateral enables lenders to recover money in case of default, and if you fail to keep up, lenders will ensure that your car holds enough value to recover their money as much as possible. If you need a large amount of money, you should take out loans secured against your property.
• Negative equity trap
You can end up owing more than the car’s value if the loan repayment term is long or interest rates quite high.
Things you should consider before taking out loans against your car
Here is what you need to consider before taking out loans against your car in the UK:
• Check APRs, interest rates and total repayable amount to decide whether the cost of the debt is affordable.
• If possible, you should choose a shorter repayment period to avoid negative equity and save on interest.
• Ensure your credit score is not too bad as it will reduce your chances of being accepted at lower interest rates.
• Verify that the lender you are borrowing from is registered with the FCA.
To wrap up
Loans against cars in the UK are secured loans. There is a risk of losing your car in case of default and therefore you should ensure your repayment capacity. Consider other alternatives such as unsecured loans first. Loans against cars should be used only when you cannot qualify for unsecured loans.
