What happens if I default on a secured loan?

What is a secured loan?

A secured loan is offered by lenders to borrowers who have something of value to offer as collateral. It is sometimes referred to as a home-owner’s loan, as typically the item of value will be the borrower’s home. In some instances, the asset selected to be used as collateral could be high value jewellery or a vehicle.

Secured loans are typically for large amounts, usually at least £10,000, and repaid over prolonged periods of up to 30 years. They offer attractive interest rates and are often advertised as being suitable for those looking to consolidate existing debts.

Whilst many people enjoy the opportunity that such loans offer to reduce monthly outgoings and ease their financial burden, Money Saving Expert Martin Lewis urges consumers to be cautious about opting for one due to the high level of personal risk involved should you later be unable to afford the contracted repayments.

Why would someone choose a secured loan?

Secured loans are often chosen by people who have outstanding debts that they wish to consolidate and who want a reduced interest rate or a longer repayment period. They often choose a secured loan as a way of reducing their monthly payments and simplifying their repayments.

Others select a secured loan when they are planning major home renovations. The intent here is to increase the value of the property so that the loan can be paid off through the sale of the house once the work is complete or at such point that they no longer wish to live in it.

Secured loans are usually available to people with a poor credit history as the lender is accepting a lower risk due to the collateral that is required. It is important, however, to remember that if you have a poor credit history because you do not have a good track record of repaying your debts, taking out and then defaulting on a secured loan could cost you your home.

Why are secured loans cheaper?

It is important to remember that the only reason that a secured loan is cheaper than a standard personal loan is because the lender is taking on a reduced risk. Because they have secured your property or other valuable item against the loan, they know that you are less likely to default on your payments. This is due to the fact that should you cease making repayments on the loan, the lender is within their legal rights to apply for a court order and sell your property to recover the money owed.

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What happens if I default on a secured loan?

When you take out a secured loan, you agree to a repayment schedule which must be upheld. If you miss a payment (known as a secured loan default), your lender will record this on your credit file and this will lower your credit score which can affect your ability to apply for credit in the future.

Your lender will issue you a Notice of Sums in Arrears if you miss more than two consecutive payments and as per the Consumer Credit Act 1974, you may be issued with a default notice after three missed payments. These communications will outline the amount owing and detail the consequences of failing to pay. They will also advise you on how to contact a debt charity if you need support with your finances.

If you miss a trigger number of consecutive repayments, which will be detailed in your loan agreement, and are not communicating with your lender as to the reason why you are failing to pay, they are legally entitled to repossess your item of value (usually your home) and sell it. They will keep the amount that they are owed and any fees that they have incurred, and return the balance, if there is one, to you. If your home was held as collateral and the lender sells it to recoup the money that they are owed, you could be left homeless.

I’ve a secured loan default what happens now?

The best time to tell your lender that you are having difficulty in repaying is before you default. It is much more effective to be open and up front with your lender about any changes to your circumstances that are impacting on your ability to make repayments before they become an issue.

In some circumstances, a lender may agree to a reduced interest rate or a longer term to reduce your monthly payments to a more manageable amount. If you involve the support of a debt management specialist such as Step Change [1], you may even be able to take a repayment holiday, have your interest frozen or your payments adjusted.

If, however, you have already defaulted on a payment, you need to contact your lender immediately to begin discussions on how to address the situation.

Can a lender write off a secured loan?

It is very unlikely that a lender would write off a property secured loan. In almost every situation, if you wish to end the loan before the end of the term, you will need to pay it off in full.

You can either pay off the loan using personal savings or by selling the asset which is held as collateral against the loan and using the income generated to pay your outstanding debts. You will only be allowed to sell the asset with the agreement of the lender, especially if it is a mortgaged property as the secured loan would be considered a "second charge" on the asset and the first charge would take precedence for repayment.

If any debt remains after the asset has been sold, it will need to be repaid separately. If you don’t have sufficient personal funds to cover the shortfall, you would need to seek specialist financial advice.

Paying off the loan in full earlier than the stated repayment date may attract early repayment charges, depending on the terms and conditions that are specific to your loan and lender. So, it is always worthwhile discussing your plans with your lender before enacting them.

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What alternatives are there to a secured loan?

There are a number of alternatives to a secured loan. To determine which is most appropriate for you, you should consider what you need the loan for.

If it is for a large purchase or home improvements, consider whether it would be better to delay them to allow you time to save up to pay for them in full out of personal funds. Creating a budget whereby you understand your income and outgoings will allow you to identify and eliminate any unnecessary expenditure, thus increasing your savings more quickly.

If you are planning vital home improvements that cannot wait, you could consider remortgaging to fund the necessary work. You should discuss this with a specialist mortgage advisor to ensure that it is an appropriate option for your personal circumstances and that you can afford to make the new repayments.

Your final option is to take out an unsecured personal loan. This loan is likely to be of lower value and with a shorter term. However, it is not secured against your personal assets and therefore represents a lower risk to you. You should only choose a personal loan after all other avenues have been explored and excluded and you must be confident that you will be able to afford the repayments. This is because although no asset will be seized and sold if you default, nevertheless failure to pay will still impact your credit score and make it harder for you to get credit in the future.

What is the best secured loan?

If you have decided that a secured loan is the right choice for your individual circumstances, and you have a property or other item of value to offer as security, you should use a secured loan calculator [1] to conduct a secured loan comparison. This will allow you to choose the loan that best suits your needs. Check whether any added fees will be payable to ensure that you understand the full extent of the costs that you are agreeing to.

Always remember that choosing to take out a secured loan against property comes with the risk of losing your home if you are unable to maintain repayments, so choose a loan that will be affordable long-term even if your personal circumstances change.

If you are looking to consolidate debts or are concerned about your ability to make repayments, you should seek independent financial advice before proceeding to take out a secured loan. Charities such as Step Change can help you to understand your options and manage your creditors without having to risk your home.

It is essential that if you do take out a secured loan, that you do so with a company that is authorised and regulated by the Financial Conduct Authority (FCA) [3]. This will protect you from scams and safeguard your collateral.

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References

• [1]www.stepchange.org
• [2]freepricecompare.com
• [3]www.fca.org.uk