Are car loans secured or unsecured? It depends on the kind of car finance you take. That choice decides who owns the car while you're paying and what can happen if money gets tight.
A secured car loan is tied to the car itself, so the lender can take the car back if you stop paying. An unsecured car loan isn't tied to anything you own, so the lender has only your promise to repay.
The car in a secured loan works as 'collateral', meaning something of value the lender can recover to get its money back. You can think of it as the lender's safety net. With an unsecured loan there's no safety net, so the lender relies more on your credit history when deciding whether to lend and at what rate.
Hire Purchase (HP) and Personal Contract Purchase (PCP) are the common secured options, and most car finance arranged at a dealer is one of the two. A personal loan from a bank is the usual unsecured option, and the car is yours from day one.
| Secured (HP or PCP) | Unsecured (personal loan) | |
|---|---|---|
| Who owns the car | The lender, until the final payment (or the balloon payment on PCP) | You, from day one |
| What sets your rate | Credit history, lender and dealer deal | Credit history and income |
| How much you can borrow | Based on the car's price and what you can afford | Based on your credit and income, up to the lender's limit |
| If you miss payments | Default notice first; court order needed once a third is paid; a shortfall can lead to a CCJ | The lender can't take the car, but can seek a CCJ |
| Handing back early | Voluntary termination, capped at half the total payable | No such right; you sell the car to clear the loan |
| If the car is faulty | Claim against the lender | Claim against the dealer |
| Credit file | Missed payments recorded; a default stays 6 years | Missed payments recorded; a default stays 6 years |
HP and PCP count as secured because the lender buys the car from the dealer and owns it until the agreement ends. You drive it, insure it and look after it, but the car stays the lender's property until the last payment. That ownership is what lets the lender take the car back if you stop paying.
Hire Purchase (HP) is a car finance agreement where you pay fixed monthly instalments, and the car becomes yours after the final payment and any option-to-purchase fee. That fee is a one-off charge that transfers ownership to you. Until then, you can't sell the car without settling the finance first.
Personal Contract Purchase (PCP) is a type of hire purchase where your monthly payments cover part of the car's value and a final 'balloon payment' buys the rest. Ownership passes to you only if you pay the balloon. Or you can hand the car back at the end, as long as it's within the agreed mileage and condition.
A personal loan for a car is usually unsecured, so you own the car from the moment you buy it and can sell or change it whenever you like. The lender has no claim on the car, only on the money you owe.
If you fall behind, the lender can't take the car back. But it can go to court for a County Court Judgment (CCJ), a court order telling you to repay the debt. A CCJ stays on your credit file for 6 years and makes future borrowing harder and more expensive.
With no car to fall back on, a personal loan lender sets your rate and how much it'll lend mainly from your credit history and income.
If you miss payments on HP or PCP, the lender can repossess the car, which means taking it back and selling it to cover what you owe. But it must send you a default notice first. That's a formal letter setting out what you owe and giving you at least 14 days to catch up.
Once you've paid a third or more of the total amount payable (everything you'll repay, including interest and fees), the car becomes 'protected goods' under the Consumer Credit Act 1974. From then on, the lender needs a court order to repossess it unless you agree to hand it back.
If the car sells for less than you still owe, you're liable for the shortfall, and the lender can take you to court for it. Missed payments also go on your credit file. A default, the marker a lender adds when it closes your account because you've fallen seriously behind, stays there for 6 years.
Struggling with payments? Talk to your lender early, because it may agree a lower payment for a while. Free debt advice is available from MoneyHelper, StepChange and National Debtline, and there's help if you can't afford your car finance payments.
You can hand the car back early on HP or PCP through voluntary termination, a Consumer Credit Act 1974 right that caps what you pay at half the total amount payable. It gives you a way out if your circumstances change. Arrears and charges for damage beyond fair wear and tear can still be owed on top.
On a PCP, the balloon payment counts towards the total, so you reach half later in the agreement. A personal loan has no equivalent right, because the car is already yours to sell. There's more on handing back a car with voluntary termination
Secured car finance isn't automatically cheaper than a personal loan, because your rate depends mainly on your credit history and the lender. With a strong credit file, a personal loan from a bank can come in at a lower APR than dealer finance. With a weaker file, you're more likely to be offered HP or PCP, and at a higher rate.
Dealer offers and the commission paid to a dealer or broker can also change the rate on HP and PCP. So compare the APR and the total amount payable, not the product name.
Your APR – the yearly cost of borrowing, including interest and fees – sets how much the car costs you in total. Borrow £12,000 over 5 years at 9.9% APR and you'd pay about £3,113 in interest. At 21.9% APR, the same loan costs about £7,063 in interest. That's £3,949 more for the same car. These figures treat the APR as a yearly rate compounded monthly, with no fees.
Secured car finance through HP or PCP is usually easier to get with bad credit than an unsecured personal loan, because the lender can recover the car. Expect a higher rate, though. Every lender checks both your credit history and whether the repayments are affordable, but personal loan lenders lean harder on your credit file.
Some specialist lenders work with people who have missed payments, defaults or a 'thin' credit file (a short credit history with little to go on). Rates for poor credit can sit well above typical rates, so check the total amount payable before you sign.
Secured car finance suits you if you're buying from a dealer and you're happy for the lender to own the car until the end. An unsecured personal loan suits you if your credit is strong enough for a competitive rate and you want the car to be yours outright from the start.
Want lower monthly payments and the option to hand the car back at the end? PCP fits. Want the car to be yours after the last instalment, with no lump sum? Go for HP. If you're unsure, HP is the plainer of the two, with fixed payments and no balloon. The PCP vs HP comparison goes into more detail.
To see which deals you're likely to be accepted for, the Carplus car finance eligibility checker uses a soft search, so checking won't affect your credit score.
