Can you use your car as collateral for a loan?

You may be able to use your car (or a different vehicle, such as a van or motorbike) as collateral for a logbook loan - if you meet the lender’s criteria. Be aware, they tend to be expensive, and if you fall behind on your repayments, the lender could repossess your vehicle.

6 min read
car parked outside of house

How do logbook loans work? 

Logbook loans work differently from other types of car finance (such as hire purchase and personal contract purchase), in that you already need to own the vehicle before you apply. The lender doesn’t supply you with a car.

No credit check is required, so they tend to appeal to those with poor credit. However, there are risks involved and these types of loans tend to come with high interest rates.

When you apply for a logbook loan, the lender will ask you to sign what’s known as a ‘bill of sale’ as well as a credit agreement. This is a legal document that transfers ownership of your vehicle to the lender for the duration of the loan (until it is paid in full). A fee is usually applicable.

Even though you hand over ownership of the car, you are still allowed to drive it - as long as you continue to make your loan repayments. If you fall behind, the lender could take back your car (in the worst-case scenario). Bear in mind, you cannot sell it yourself until you have paid off the loan in full and you assume full ownership of the vehicle.

How much can I borrow and how long for?

The amount you can borrow with a logbook loan depends on your individual circumstances and how much your car is worth. Generally speaking, lenders may offer you up to 50% of your car’s value. They’ll normally transfer you the funds electronically.

Regarding the loan term, logbook loans tend to run for up to 78 weeks. It’s worth remembering that you’re legally allowed to pay the money off early if you want, although there may be an early repayment charge for doing so. 

What documents do I need?

As part of the application process, you’ll need to provide the lender with your logbook (V5) or registration document. This shows that you own the car and allows the lender to check whether there is any existing finance against it. If there is, you’ll need to get permission from your current provider to take out a logbook loan.

How risky are logbook loans? 

There are several risks involved in taking out a logbook loan. You should look into these before deciding whether to take one out. For example:

  • you could lose your car – if you stop making repayments on the loan, the lender can repossess the vehicle you secured the loan against
  • it may damage your credit score – not meeting your repayment plan will damage your credit score and you may incur late fines
  • you will need to commit to paying the loan back for up to 78 weeks – if your financial circumstances change in this time, you’ll still need to pay the loan back
  • logbook loan providers aren’t heavily regulated – so they are riskier than car finance, for example
  • logbook loan interest rates can be very high – sometimes as much as 500%

Factors to think about before taking out a logbook loan 

Make sure you consider the following factors before you commit to getting a logbook loan, including how much your vehicle is worth and how much you’ll need to pay in total.

Your vehicle might not be worth enough

How much you can borrow depends on how much the car is worth. If it’s only worth a few hundred pounds, you may struggle to get a logbook loan for the amount you need.

Bear in mind, if you get a logbook loan and your car does end up being repossessed due to non-payment, you will be liable for paying the difference between what the lender sells it for and the outstanding balance on the loan (i.e. the shortfall).

The Annual Percentage Rate (APR)

APR is how much interest and charges you’re charged annually. This can be fixed or variable, depending on which deal you’ve gone for. With variable interest, you need to be confident that you can still afford the monthly repayments even if the interest increases. Fixed interest allows you to be certain of how you pay each month, but interest rates for logbook loans are often 400% or more.

You need to be the legal owner of the vehicle

As mentioned, in order to take a logbook loan out on a car, you need to legally own it. This means that if your vehicle is on car finance or already has credit secured against it, you probably won’t be able to take out a logbook loan.

Hidden fees and costs

Check out all of the fees and costs involved in the logbook loan you want to take out to make sure there aren’t any nasty surprises later on. They’ll all be listed in your credit agreement.

You may not be able to set up a monthly direct debit

Some lenders require you to pay weekly or won’t allow you to set up a direct debit. You should be aware of this and confident that you can be organised enough to make the repayments on time.

Otherwise, you risk incurring late fees or even having your car repossessed as a last resort. Just one missed payment could cause your credit score to dip by around 130 points.

What happens if you can’t pay your logbook loan? 

If you can’t pay back your logbook loan, the lender has the right to send a bailiff round to repossess your vehicle (as a last resort). However, there are criteria they need to meet before doing this.

By law, they must send you a default notice and give you 14 days to respond beforehand. They must also have registered the bill of sale to the High Court – you can check if they’ve done this with the Royal Courts of Justice. If they haven’t registered the bill of sale, they’ll need to get a court order to repossess your car.

If you are struggling to pay your logbook loan, we suggest you get in touch with the lender as soon as possible to try and prevent it from getting to this point. It may also be worth seeking free debt advice from a charity such as StepChange.

Alternatives to logbook loans 

There are several alternatives to logbook loans, such as: 

  • a homeowner loan is a form of borrowing that you secure against your house. You can usually borrow larger amounts than with a logbook loan, although you risk losing your home if you stop making repayments
  • if you don’t need to borrow a large amount of money, you may want to consider getting a credit card instead
  • an unsecured or personal loan may be a good alternative if you don’t want to secure the loan against an asset. Just be aware that you might need good credit to get accepted
  • if you have bad credit, you might want to consider getting a guarantor loan to help you access a better interest rate. Remember that the person who acts as your guarantor will become jointly liable for the repayments
  • a debt consolidation loan could be the answer if you have multiple debts and want to streamline your finances. Calculate the total cost of the loan before you consolidate your debts, so you don’t end up paying more in interest. Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total