Secured loans are often the stepping stone that helps you buy some of the most important things in your life – usually your house and car. They’re also useful for raising larger sums of money – for example if you need to buy several items of furniture at once, or you’re renovating your home. However, as with any form of credit, you need to be careful.
In this guide we’ll explore secured loans. We’ll cover what a secured loan is, keeping up with secured loan payments, and what happens when you default on secured debt.
What is a secured loan?
Secured loans are loans secured against your property, most commonly your home, car, or another valuable item. Secured debt gives the lender collateral in the event that you default on the loan, and can therefore make it more likely you’ll be accepted for a higher loan amount.
Debts secured against your home or other valuable items shouldn’t be taken lightly, because the company you borrow from can take them from you if you fail to keep up with payments.
They can also take all the normal debt recovery routes to do this, including using debt collectors, sending threatening letters, and persistently contacting you. In the long term, this can damage your credit score and cause you high levels of stress.
How do secured loans work?
By entering into a secured loan, you’re giving the lender the right to take away or repossess an asset if you default on the arrangement.
You give the lender extra security; reassurance that you will pay what you owe rather than face having you car taken away (in the case of an auto loan).
This extra security usually means you can borrow more, at a lower rate of interest, with secured debt. It allows lenders to offer more favourable terms, and can also make it easier for borrowers with a poor credit history to access credit they wouldn’t get elsewhere.
You repay a secured loan in the same way as other types of loans, through installments. Interest will be charged on top of what you owe, and there may be added fees or charges if you’re late with a payment.
Where secured loans differ is when you default on your agreement. That’s when people face their assets being taken away.
And if your home or other items are taken, this doesn’t always mean the debt is settled. In cases where the money raised from the selling of the secured item doesn’t cover the outstanding balance, the company can still take you to court to get the rest of their money.
What are common types for secured loans?
Because they are set against an asset, secured loans enable people to access large sums of money they might otherwise struggle to raise.
They allow people to take some of the most important steps in their financial life, and some of the most common examples may be recognisable to you.
The most common unsecured loan is a mortgage. Not many people can pay for a home in cash, so they approach lenders for a loan to purchase the property.
The borrower will work out a repayment scheme with the lender, with interest rates included, and the property is held in security – meaning borrowers who default on mortgage payments face losing their home to a creditor.
Second charge mortgage
By paying your mortgage, you gradually build up equity in the property – percentage of the home you own outright. If you have enough equity in your home, you might consider taking a second charge mortgage, in which you use the equity in one property as collateral for a loan to buy another property.
Debt consolidation loans
People struggling with debts to multiple creditors may take out a debt consolidation loan and use it to pay off all their debts. While it means borrowing more money, it allows them to merge their debts and focus their repayment on a single lender.
Debt consolidation loans are usually secured against a valuable asset like a home, although consolidation loans can also be unsecured.
What's the difference between secured loans vs unsecured?
An unsecured loan is a loan that requires no collateral. You can borrow money from a bank or other lender and won’t have to put up your house, car, or other assets as security.
Typical examples of unsecured debt includes credit cards, student loans, and personal loans.
The main benefit of an unsecured loan is that it protects your assets. If you default on a credit card payment, for example, you won’t be in danger of losing your home.
The drawback of this is that, without the additional security, unsecured loans can be harder to get than secured loans, and often come with higher interest rates and charges.
Secured loans can offer a cheaper way to raise larger amounts of money, but there are risks. The interest rate on a secured loan is often lower because the risk to the loan provider isn’t as high.
The downside of this is they have the right to take the secured item if you can’t keep up with your payments.
It’s not a good idea to take out this type of loan to help you pay off other bills such as your credit card or council tax. There are always other debt solution options that don’t involve putting your home or other possessions at risk.
Can I lose my home to a secured loan?
Yes, absolutely. The loan company will normally write to you first, asking you to make a payment to cover any you’ve missed. Don’t ignore this letter, even if you can’t pay right away.
If you have missed payments and your loan provider is threatening you with repossession, you need to act quickly. Stay in contact with them and make it clear that you’re keen to sort out the problem.
If your lender does not want to offer you other payment options and is looking to proceed with court action, contact one of our advisors. We could help you find another debt solution and slow down or stop the repossession process.
How do I stay on top of secured loan repayments?
It’s always possible to turn things around – but only if you face up to the situation. Here are just a few ways you can prevent the situation from getting worse if you’ve missed a secured loan repayment:
Make a budget
Most payments to secured loans are a set amount, at least for certain amount of time, so it’s easy to know how much you need to pay. Set aside that amount of money each month to make sure you aren’t caught short when the payment date comes around.
Remember that secured loans are priority debts
If you are struggling to pay off multiple debts, it’s smart to make sure you pay any secured loans you have first. This way, you’re less likely to reach the stage where your belongings are seized.
Speak to your creditor or lender
If you’re worried that you aren’t going to be able to make a payment, contact the loan company to discuss your options. They may be able to adjust your plan to make it more affordable for your circumstances.
How can I protect my property from a secured loan lender or credit broker?
While living with any kind of debt is stressful, the results of defaulting on a secured debt can change your life. When the lender comes to collect, you could face losing your home, your car, or something even more important.
That’s why it’s crucial you reach out for debt help before things escalate. Creditfix helps people deal with money probelms, and our team of advisers are specialists in both secured and unsecured debt solutions.
We can start to work through your debt problems from the moment you contact us and our friendly, professional team are trained to give you the best advice for your situation. Don’t wait until it’s too late. Call us now for free debt advice – the phone number is 0800 0431 431.