Defaulting on a secured loan agreement can put your home at risk and cause lasting damage to your credit report. Moreover, failing to meet your payment obligations can seriously impact your credit history. Not only does it show you struggled to manage money, but it will also severely affect your eligibility for future credit.
Are you a homeowner or a tenant?
A secured loan can help you fund a major purchase, consolidate debt and borrow money with lower interest rates. It can be a great way to access money because you can get larger sums of money with better repayment terms.
But a secured loan is secure for the lender because you have to offer up something valuable in return for the money, usually your house. Therefore it’s perfectly normal to be concerned and ask the question – what happens if I default on a secured loan?
That’s because for all their benefits, secured loans come with risks—especially if you fail to meet your repayment obligations. Defaulting on a secured borrowing agreement can put your home at risk and cause lasting damage to your credit report.
Short on time? Here are the key takeaways:
- Secured loans offer many benefits, but they also come with risks. Failing to meet your payment obligations can put your home at risk.
- There are various options available if you can’t make regular payments, including payment holidays and breathing space.
- Specialist loan providers can offer tailored agreements, whereas mainstream providers use standard eligibility criteria. You can access a specialist service by contacting a dedicated loan broker and exploring your options.
How do secured loans work?
Secured loans are popular financial products that allow homeowners to borrow money from lenders and offer their property as security. If you own equity in your home and are willing to use it as an asset, you could receive a lump sum loan and pay back the money over a specified period.
Unlike unsecured loans, secured borrowing doesn’t rely on your credit score or income, as lenders can recover their money by selling your secured asset.
If you don’t have a good credit score, you may be able to get a secured loan – as long as the lender has security through something valuable you own.
Dealing with secured loan debt
According to research from the Office for National Statistics, the amount of people taking out secured loans in the UK has steadily increased between 2019 and 2023. The Finance and Leasing Association revealed secured loan applications saw a 52% increase in 2022.
However – while not specific to secured loans – research also shows that people are struggling financially, and many can’t keep up with their monthly payments.
Research published by Age UK shows that older people are spending more on their credit cards, and the Financial Times published an article with lenders saying they’re dealing with defaults frequently.
Dealing with secured debt can feel like a never-ending struggle, and defaulting on your monthly repayments means the lender has the right to initiate proceedings.
I missed a payment. What next?
Missing just one payment might not seem like a big deal, but your loan agreement will specify that you make monthly repayments. Some people might miss payments because they forget their obligations, while others might not have enough money in their accounts.
Whatever the reason, you should take some vital steps to ensure the situation doesn’t get worse.
Get in touch with your lender
The first step is to contact your lender and tell them you’re aware you missed the repayment. They’ll usually ask why and if you can make the payment. If you have money available, it’s best to offer them an immediate repayment, as it keeps you on track and ensures no further action.
Dealing with money issues is a challenging experience, but speaking to your lender about your repayments can give you some much-needed breathing space. Lenders can agree to payment holidays or lower your monthly payments.
We’ll explore the available options in more detail later, but the critical thing to know is there are ways to reduce your financial burdens.
Approach your lender immediately
Defaulting on just one payment can have a negative impact on your credit score. However, burying your head in the sand is counter-intuitive, as lenders may be able to offer support and remove any late repayment charges.
Some lenders might also show goodwill by not registering a late or non-payment, which means it won’t appear on your credit file.
Missing multiple loan repayments
If you’ve missed payments frequently, your lender will contact you to discuss the situation. It’s best to explain why you’re unable to make regular payments, as they might offer to lower the monthly amount.
However, your lender will want to see evidence of your finances, as the loan repayments should take priority over general living expenses.
For example, the lender is unlikely to be sympathetic if you decide to go on holiday or spend money on other luxuries. But, if you lose your job or have to take a pay cut, you could receive a payment holiday or be able to make reduced payments.
How do lenders deal with missed payments?
If you default on a secured loan, the lender can take action. You won’t immediately lose your home, but lenders follow a process that – if left unresolved – can result in them taking possession of your property.
Most secured loans are regulated by the 1974 Credit Consumer Act, which protects borrowers and ensures lenders follow a set process when trying to recover their money.
Here’s how it works:
Notice of arrears
Lenders send Notice of Arrears letters when you miss two monthly or four weekly payments (depending on your contract). These letters detail the money you owe and offer advice on your next steps.
They usually include places where you can get free advice on debt management and are an initial warning. You’ll usually receive letters twice a year until you agree to a repayment plan or clear the debt.
If your lender issues a notice of arrears and you continue to miss payments, the lender can send you a default notice. These notices are a sign that the situation is worsening and are warnings that you need to arrange repayment immediately.
It’s also the last step before your account officially defaults, and most lenders will give you two weeks to settle any debts. However, the missed payments will still appear on your credit report and reduce your score.
Credit report defaults
Failing to catch up after the lender issues a default notice means it will appear on your credit file and negatively impact your score. People with bad credit struggle to find other borrowing solutions, and it can also reduce your chances of renting a property or even getting a phone contract.
Default markers remain on credit reports for six years, and once the lender registers it, your total outstanding balance becomes repayable in full.
Going to court
If all of the above fail to result in a repayment, the lender can initiate court proceedings. Their main reason is to gain control of your house and sell it to recover their money. However, your lender must also follow set processes before they can repossess your property, as outlined by Shelter.
Managing secured debt
While secured loans have many benefits, they also require careful management. Understanding your financial responsibilities and making regular repayments protects your home, so it’s essential to implement an effective repayment plan.
Here are some top tips for managing secured debt:
Budget accordingly: Your loan repayments should be a priority, so be sure to pay them first and set a budget that lets you know how much money you have each month after you make a payment.
Avoid overspending: One of the biggest mistakes people make is getting a secured loan but spending money on credit cards. Racking up a huge credit card bill will only cause more financial problems, which could mean you juggle multiple debts.
Save frequently: An emergency fund is always a good idea because you can use it to pay for repairs or necessary purchases and still meet your payment obligations.
Be open: It’s natural to worry about talking to your lender, but they can offer various solutions that keep you on track with your loan payments and give you more breathing space.
Seek advice: If debt is getting you down, ask the Citizens Advice Bureau for support. They’ll be able to discuss your secured loan arrears and help you manage the payments.
Secured loan payment options
As mentioned earlier, some lenders might offer you breathing space or a payment holiday. Both are different, but each can be beneficial if you need help to meet your monthly repayment obligations.
Also known as the Debt Respite Scheme, breathing space gives you a break from your debts. Successful applicants won’t have to worry about increasing interest rates or court action for 60 days but are still expected to make regular repayments.
You can only access this solution if you have secured loan arrears, as the loans themselves aren’t eligible for the scheme.
Payment holidays allow you to stop your repayments for an agreed time when you’re struggling to make ends meet. During this time, you won’t need to make any payments for up to 12 months, but the interest will still accumulate.
Are there other types of loans that don’t come with the same risks?
All loans have risks, but unsecured loans don’t use your property as an asset. Instead, lenders look at your credit score and income to decide whether you’re eligible. Getting an unsecured loan has drawbacks, as lenders can still take you to court.
Also, an unsecured personal loan poses more risk to the lender, which means you’ll receive higher interest rates. If you’d like to discuss your borrowing options, Believe Money is an award-winning unsecured and secured loan broker specialising in helping our clients find the right solution for their needs.
Our dedicated brokers will help you explore your financial options and offer access to a wide range of specialist lenders. Please feel free to contact us for a free consultation today.
How are default and delinquency different?
Delinquency comes before defaults, as lenders issue them when you make a late repayment. They also usually come with fees. Defaults are given when you miss multiple repayments, which is when lenders take action.
Can I repay my secured loan early?
Some lenders will enable you to pay your loan back early, but they often come with early repayment fees, so it’s best to check the small print before deciding.
What will happen to my credit score if I can't repay the loan?
Failing to meet your payment obligations can seriously impact your credit history. Not only does it show you struggled to manage money, but it will also severely affect your eligibility for future credit.
For example, credit card companies might turn you down, making it harder to fund certain purchases. A default on a secured loan will last for six years.
Why Use Believe Money?
Whatever you need a secured loan for, we’re here to help. Our specialist advisors are available Monday to Friday, so if you need any help please contact us online or give us a call on 01302 238209.
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