Modern life moves fast and our financial and personal circumstances can change just as quickly. If you have one or more loans, you have likely already considered what might happen if you are unable to continue to make repayments.
If you are currently questioning how missed secured loan payments may affect your credit score, what your options are if you’re struggling to pay, and whether your debt can be written off by your creditor, this article covers everything you need to know.
What is a secured loan?
Secured loans allow borrowers to borrow money from a lender by putting an asset, such as a vehicle or property, as collateral or security. For this reason, secured loans are also sometimes referred to as second-charge mortgages, home loans or homeowner loans.
Borrowers are still able to use and freely access the asset given as security against the loan, however, if regular repayments are no longer being made, then the lender will seize the asset, sell it, and use the proceeds of the sale to clear the outstanding debt.
Unsecured loans are another common option for borrowers, however, there is no requirement to offer any assets as security. While unsecured loan creditors can still chase borrowers in arrears by seizing assets to be sold, it is a much more complex process for them and they must use the courts to do this.
As lenders can sell the asset put up as collateral if borrowers don’t keep up with repayments to recoup their money, secured loans are commonly taken out by borrowers who:
Need a long term loan
Want to borrow a large amount of money
Are struggling to find a lender to approve a personal loan application
Whether you want to take out a secured or unsecured loan, it is important to only look at lenders who have full authorisation from and are fully regulated by the Financial Conduct Authority (FCA). We recommend completing a thorough secured loan comparison process to find the best lender for your circumstances, taking into account everything from interest rates to early repayment fees.
How does a secured loan work?
There are a variety of loans that sit underneath the secured loan umbrella, each of which have their own purpose and benefits. In most cases, secured loans allow borrowers to access money as a lump sum, however, there are options that provide access to credit over a period of time.
Borrowers are required to repay the money they have borrowed via a fixed term of monthly payments. These monthly payments will include both the principal loan amount and the cost of the interest that has been accrued. In some cases, it may be possible to repay a loan in full before the end of the fixed term, however, borrowers may be subject to additional early repayment charges which will be set out in the initial loan agreement.
If the financial and personal circumstances of the borrower change during the term of their secured loan meaning that payments are missed, the asset they used as collateral could be seized by the lender. It is important for borrowers to communicate with their lender if they are struggling to make repayments because if more than one repayment has been missed, the lender retains the right to repossess the collateral asset to clear the outstanding debt.
Examples of secured loans
As mentioned previously, there are a variety of different loans that sit underneath the secured loan umbrella.
Despite being perceived as in a category of their own, mortgages are very much a form of secured loan because lenders can repossess if mortgage payments are missed.
Home equity loans
Although equity within a property is offered as collateral for a home equity loan, if payments are not made, the lender can seize the property. When taking out any secured loan against property, it is vital that you understand what action the lender will take if repayments are missed.
General secured loans
With a more general secured loan, borrowers can put up a vehicle or other asset as collateral and the borrowed money can be used however the borrower wishes to use it.
When taking out a secured loan, it is important to explore your options to ensure you’re getting the best secured loan for your circumstances. One of the best ways to do this is to use a secured loan calculator, which will provide you with a range of options from different lenders with different interest rates.
Can I take out a secured loan with bad credit?
If you have a poor credit record, it can be extremely difficult to obtain further credit because lenders will see you as a higher risk and will have less confidence that they will recoup the money paid to you.
With that said, it may be possible to find a lender who will allow you to take out a secured loan, however, it is likely that you will have fewer options than someone with a good credit record. Typically, you will only be offered secured loans with higher rates of interest, so it may be in your best interests to focus instead on improving your credit score before applying for a secured loan.
What happens if I miss a secured loan payment?
Immediately following a missed payment, your lender will call, email or write to you requesting that the payment is made quickly. If you choose to ignore these communications or fail to make a payment in a reasonable amount of time, your lender can place a default on your credit record, which will negatively impact your credit score.
Credit record defaults will make it more difficult for you to borrow money in the future, affecting everything from mortgages to credit cards and personal loans. If you make a payment shortly after your lender has informed you that a payment has been missed, they are unlikely to report a default and your credit score will remain unaffected.
If you do not make any further payments on your secured loan and accrue several defaults, your lender may choose to seize the asset that has been listed in your initial loan agreement.
My asset has been seized. What happens to my secured loan now?
When a secured loan asset has been repossessed by the lender, it will be sold. The money raised from this sale will be used to clear the outstanding debt, including missed payments, the remaining balance, interest payments, and late fees. As most asset sales are completed via auction, you may also be required to pay a range of other fees, including auction house costs and legal fees.
If the money raised from the sale of your asset is enough to settle the outstanding debt plus fees, then that will be the end of the matter. Any funds that remain will be returned to the borrower. However, if the sale of the asset does not cover the outstanding debt and additional costs, lenders have the right to pursue the borrower for additional money.
Can a secured loan be cancelled?
In most cases, lenders will not agree to the cancellation of a secured loan. It is worth noting, however, that if you want to cancel a secured loan car finance agreement, it may be possible for you to return the vehicle and cancel the outstanding debt. This is a loophole that you may benefit from, so it is worth looking at the finance agreement made when you purchased your vehicle.
Can a secured loan be written off?
While it is technically possible for a lender to write off a secured loan, it is not easy to convince them to do so with a secured loan because they have another very straightforward option open to them to recoup the money owed in the form of seizing the collateral asset.
However, it is always worth pursuing this option because having debt written off is possible and comes with a wealth of benefits, including:
Reduced stress and anxiety
No longer being pursued by creditors
The ability to make a new start debt-free
If creditors are convinced that your circumstances make it highly unlikely that they will recover the debt owed, they may choose to write off your loan or simply decide to stop pursuing you for the money owed.
There are many situations that can lead creditors to recognise that their chances of recovering the money owed to them is low, including if you have a serious illness and if other creditors have opted to agree to debt write-offs.
Importantly, creditors must always treat you fairly and act in accordance with guidance from the Lending Standards Board. This guidance states that firms must properly take into account the circumstances of the borrower and carefully consider whether a fair outcome can be sought by pursuing the amount owed.
The Money Advice Liaison Group has also issued guidance to lenders specifically regarding writing off debt for borrowers with long-term mental health conditions. This mostly applies to unsecured loans, however, we recommend seeking independent financial advice to ensure that you understand each of the options that are available to you.
I can’t make my secured loan repayments. What can I do?
If your circumstances mean that you cannot make payments in accordance with your loan agreement, you should quickly contact your lender. In most cases, lenders don’t want to repossess property or other assets and will be able to work with you to find a fair solution.
There are a number of options that your lender may offer.
One of the most common solutions offered by lenders is to reduce your monthly repayments to make them more affordable. This will typically come with an extension on the term of your loan, which means that you will end up paying more over the long term. However, it will help you to avoid negatively impacting your credit score and allow you to keep hold of your assets.
You can choose to sell your asset and use that money to repay your loan. Do note that there may be an additional early repayment fee to pay. So, depending upon the terms of your secured loan agreement, you may be required to pay more than the overall cost of your outstanding balance, which should be factored into your decision making process.
There are some advantages to this option as by selling the asset yourself, you will not be liable for any of the extra fees that are accrued when lenders sell assets on your behalf. Additionally, if your asset is in the form of property, this route will help you to avoid having a repossession notice on your credit file, which is something that can make it incredibly difficult to purchase property in the future.
If you have a number of debts, a debt consolidation loan can help you to get on top of your finances. As secured loan rates vary, it may be possible to take out a debt consolidation loan with a lower interest rate than applies to your current secured loan.
This means that you could make your repayments more affordable without needing to increase the total amount of money you will need to pay back over time. However, there is a lot of information to consider when choosing this route. Therefore, it is essential to obtain impartial financial advice to determine whether it is the right option for you.
Can secured loans be incorporated into a Debt Management Plan (DMP) ?
Unfortunately, secured loans are not eligible to be incorporated into a DMP. Similarly, they cannot form part of a Debt Relief Order .
I have a secured loan against my property. Can I sell and buy a new one?
As we have already explored, it is possible to sell property to repay an outstanding loan.
But what if you want to sell and purchase a new property straight away? Some lenders will permit borrowers to essentially transfer the collateral clause to apply to the new property, meaning that your new home will now be classed as the asset against your loan.
It should be noted that this can be a very complex process and it isn’t something that all lenders will be willing to agree to. As always, we recommend seeking expert advice before proceeding with this option.