People usually take out secured loan debt to raise large sums of money to pay for more significant purchases like a car or a home renovation.
However, you will only be able to take out this type of loan if you secure it against an asset such as a house or car.
Securing a loan against valuable assets carries a significant amount of risk because if you fail to make your loan repayments, your lender can force you to sell your asset or take it away to recover the money which is owed to them
How does a secured loan work? What happens when you are unable to make payments on your secured loan debt? If you find yourself unable to make your payments on your secured loan, read our comprehensive guide as we talk you through what a secured loan is.
What is a secured loan debt?
A secured loan is a loan you take out with a lender, but you use your assets, such as your home or car, as security if things go wrong. Secured loans are sometimes referred to as homeowner loans as generally, your house is used as collateral when taking out these loans.
However, if things go wrong, then it is your lender that prospers. If you don’t or can’t pay back your loan, then your lender can take legal action to sell your home and take your money.
This is why secured loans are seen as a risky option; however, people are often attracted by some of the benefits that secured loans offer.
What are the benefits of taking out a secured loan debt?
Most debt experts advise you only to take out a secured loan if it is the last resort, as often the risks outweigh the benefits. Here are some below:
You can borrow more
Depending on how much of your home you own and how much your home is worth, a lender could offer you £100,000 or more in secured loan borrowing. Having that amount of cash injection could potentially be life-changing for some people.
You don’t have to have a good credit rating
Often people get rejected from getting any form of credit because their credit rating is poor, however with a secured loan, lenders will be inclined to offer you money if you have a poor credit history as they have your home as security if you can’t make the repayments.
Poor credit? Find out ways in which you can improve your credit score.
You can borrow over a more extended period
Secured lenders will tempt consumers by offering you the possibility of borrowing over a more extended period. You can get a secured loan for 5 to 20 years. Showing a more extended loan period will mean that struggling people have more time to pay it back.
Why are the risks of a secured loan?
You are risking your home and a valuable asset
A secured loan uses your home or asset as security, so the consequences could be dire if you fail to make your repayments. This is a considerable risk for many people because if things go wrong, you could lose your home.
The total interest paid overtime is a lot higher
Secured loan lenders will often feed you with the marketing spiel of ‘manageable payments’ and ‘lower interest rates’.
However, tying you into a lengthier term may look like your monthly payments have been reduced on the surface; however, the interest you will pay over that period will be a lot higher.
For example, if you borrow £10,000 at a 10% interest rate over five years, your monthly payments would be 212 per month and the total interest paid will be £2,720.
Compare this to if you took a loan out over 20 years, your monthly payments would be reduced to £96, but the interest you will pay will be a whopping £13,040 (That is more than the original loan you took out!)
How does a secured loan work?
By entering into a secured loan agreement, you will be giving the lender the authority to repossess your assets (e.g. house) if you can’t make your monthly repayments.
You make payments in instalments, and interest will be charged on top of what you owe.
Secured loan lenders will generally charge a broker’s fee of up to 5.9%. This could be added to your loan amount or pay it upfront. Most people opt for the first option; however, even the broker’s fee interest will be charged. So it is essential to be aware of this.
Read our section on what happens if you can’t pay your monthly payments on a secured loan.
What type of secured loans can I get?
There are a number of secured loan options available in the UK. Here are some of the main types of secured loans:
Debt Consolidation Loans
Debt consolidation loans allow you to borrow money against your property. You will need to make regular monthly repayments.
This type of loan is generally taken out by people who want to make home improvements, pay off debts or consolidate debt.
Many people don’t often think this, but a mortgage is classed as a secured loan. With a mortgage, you can borrow up to 90-95% of the property’s value over a lengthy period.
Although there are more considerations to make when qualifying for a mortgage, the risks are the same as any secured loan, and if you fall into mortgage arrears, your home will be at risk.
Second Charge Mortgages
This is a type of homeowner loan in which you can borrow money from a lender using your property as security. This loan can be used in different ways. However, if you have enough equity in your property, you might consider taking a second charge mortgage as a loan to buy another property.
These types of secured loans are used between buying and selling a new home. They are taken out over a minimal period compared to other secured loans as they are seen as a stop-gap before a person can get their financials back in order.
What are the differences between a secured and unsecured loan?
- You require no collateral. You can borrow money and won’t have to put your assets in danger of being taken away or repossessed.
- Examples of unsecured debt include credit cards, student loans and personal loans.
- It is harder to get an unsecured loan as your loan isn’t secured under anything, so it is riskier for the lender
- They have higher interest rates
- It would help if you had a good credit rating to get a secured loan
- You take out the loan by using your assets as collateral if you can’t make the repayments.
- Examples of secured loans include mortgages, second charge mortgages, debt consolidation loans and bridging loans
- It is easier to get a secured loan as you are using your house or car as a security
- They have lower interest rates
- You can generally have a poor credit rating (depending on the type of loan); for example, a mortgage provider needs a good credit rating.
- If you have council tax debt or credit card debt, then
What happens if I can’t pay my secured loan debt?
If you don’t pay your secured loan, the repercussions could be severe. Secured loan lenders will take appropriate steps to recover their money:
Step 1: Constant correspondence and calls from lenders asking for money
If you are already under a financial strain, the last thing you need is constant harassment from lenders to ask for payments on your arrears.
Step 2: Interest and late fees
These could be applied as your loan falls into arrears. This will mean that you will start owing more than you originally agreed to.
Step 3: Default on the credit file
If you miss three to six payments, default or black marks could be registered on your credit file.
Find more about default notices and what they mean.
Step 4: A County Court Judgement (CCJ)
A CCJ could be applied once the debt has defaulted. Before it gets to this stage, you could get your CCJ discharged.
Find out more about what CCJ discharged means here.
Step 5: Lenders could apply for a repossession order
Your lender could apply for a court order to repossess the asset your loan is secured against. You may be forced to sell your home to recover their funds.
What should I do if I can’t pay my secured loan debt?
Getting into arrears with your secured loan is sometimes out of your control. It is essential to deal with this as a matter of urgency as a secured loan is classed as a priority debt. Take a look at some of the solutions that can help you.
1. Get in touch with your lender
Talking to your lender could help your situation. It is essential to be open and transparent, rather than burying your head in the sand, hoping the problem with disappear.
If you don’t feel comfortable ringing them up, write to them and explain why you can’t pay and if they can reduce or freeze your payments so that you can get back on your feet.
2. Look at your budget
If you haven’t already, get a budget done for your monthly income and expenditure. Use our handy budget planner to do this.
Look at ways to cut down on your spending on non-essential items such as TV subscriptions, gym memberships or clothing bills. Every little helps, and being more frugal with your spending will allow you to get out of debt faster.
Look at ways in which you can reduce your monthly food budget.
3. Ask friends and family for help
Swallow your pride and call a friend or family member and ask them to help you out. Borrowing off them would mean you wouldn’t need to pay the hefty interest charges attached by loan companies.
4. Consolidate your debts
If you have more than one debt, you should consider debt consolidation. This involves taking out a new loan and paying off existing loans.
5. Payback using your savings
It makes sense that if you can’t make your monthly payments, then you should use your savings.
A rainy-day fund might be a good investment for future plans. Maybe it was Christmas you were saving for or a family holiday?
However, losing your home and paying your debts would be much higher up the priority list, so if you have the savings, pay off the arrears and then address the future plans at a later date.
6. Request a payment break
If you start to feel the purse strings being tightened, then speak to your lenders immediately to see if you can get a payment break.
You still have to pay the money back, but it just gives you some breathing space. Lenders are more likely to agree to these breaks rather than you taking drastic action by cancelling direct debits.
Find out more tips on how to stop getting into debt.
If I fall into arrears with my secured loan debt, will I lose my home?
Yes, and unfortunately, this won’t happen straight away, as they will contact you to make a payment for what you have missed. If you ignore this letter, then they could proceed with court action.
Can I get help if my secured loan debt lender is taking legal action?
If you ask for a payment break or other options and the lender refuses, it is important to act responsibly.
Speak to one of our debt advisors to see if there are other debt plans available, so the situation does not escalate.