Can a secured loan be written off? 

Scores of readers and internet surfers have been asking if there’s a way to make a lender agree to write off a secured loan debt. We’ve answered this question and follow-up questions here. 

What are secured loans?

A secured loan refers to a loan that asks the borrower to use one of their assets as collateral in the credit agreement. They can still access and use the asset they list as collateral, but failure to repay the loan will result in that asset being seized and sold to clear the debt. Most secured loans require the asset to be a property or vehicle. 

The opposite of a secured loan is an unsecured loan, which doesn’t make the borrower risk any assets within the loan agreement. Examples include an unsecured personal loan or a credit card. Unsecured creditors may still chase you for arrears by repossessing assets, but they must go through a more complex and expensive process in the courts first. 

Whether you want an unsecured or secured loan, you should only compare lenders that are authorised and regulated by the Financial Conduct Authority. 

How do secured loans work?

Secured loans can refer to a wide variety of loans that are used for different purposes. Most of them give the borrower a lump sum amount, but there are some that provide credit over a draw period. 

This loan is then repaid through monthly payments over a fixed term. The payments include repayment on the principal loan amount and an interest payment. You may be allowed to pay off the loan early, although this can incur an early repayment charge. 

At the opposite end of the spectrum, those whose personal circumstances have changed and can no longer afford repayments are at risk of losing the asset they used to secure the loan. If a solution isn’t found and multiple payments have been missed, the lender has a right to repossess the asset to clear the debt. More information on this process can be found within the guide. 

What are some examples of secured loans?

Some examples of secured loans are:

  1. A mortgage – although it is often put in a category of its own, others still consider a mortgage to buy a home as a type of secured loan. The property is the collateral in the agreement and can be repossessed if mortgage payments are not made. 
  2. Home equity loan – a loan secured with equity rather than the property, but it is the property that can be seized in the event of non-repayment. 
  3. Generic secured loans – these may use different assets as security and can be used for any purpose. 

Can you cancel a secured loan?

Most secured loans cannot be cancelled. If your lender does not agree to write off the debt, you will need to come up with a way to pay. 

However, there is one exception to this rule. Those who have taken out car finance to pay for a vehicle over time may be allowed to cancel the secured loan and return the vehicle after so many payments have been made. If you want to cancel a secured car loan, you may want to look into this loophole and check your own car financing credit agreement for details. 

What happens if I don’t pay my secured loan?

If you miss a secured loan payment, the lender will write, email or call to ask you to make a payment swiftly. If you ignore this communication and don’t make the payment in good time, the lender can record a default on your credit file, reducing your credit score. 

Payment defaults will make it more difficult to take out further credit in the future, such as personal loans, credit cards and mortgages. However, if you manage to make the payment after the reminder is sent, the payment default may not be reported and your credit score won’t be affected. 

If you are unable to pay the loan repayment and continue to miss further repayments resulting in multiple payment defaults, the lender may decide to repossess the asset you listed as collateral in the loan agreement. 

What happens to a secured loan after repossession?

After your asset is repossessed, it will be sold by the lender. The money raised from the sale of the asset is used to pay your debt, including your arrears (missed payments), remaining capital owed, late fees and interest. You may also need to cover legal costs, auction house fees and more. 

There is a chance that the sale of the asset will not cover all of these things. In the event that there is not enough money to pay all of the above, the lender can chase you for the remaining debt. On the other hand, if there is enough money to settle all debts with the lender, any remaining funds will be given back to the debtor. 

Can a secured loan be written off?

A secured loan can only be written off by the lender. If you are struggling to pay, you can ask the lender to write off your loan, but it is highly unlikely that they will agree. Having any type of debt written off voluntarily by the lender is rare, especially secured loans where there is an easier pathway for them to recover the debt. 

What should I do if I can’t pay my secured loan?

If you cannot pay your secured loan the first thing you should do is communicate your circumstances with your lender. Most of the time the lender does not want to repossess your home or vehicle and would rather find a workable solution. 

You might be able to reduce your repayments to make them more affordable, while simultaneously extending your repayment period so you end up paying more back. This benefits both parties and avoids significant credit score damage and losing your asset to the debt. 

Can you get out of a secured loan?

Despite not being able to force the lender to write off the debt, there are still ways you can get out of a secured loan. There are three possible ways of escaping your secured loan without having your asset taken, some of which provide quick results while others take longer. 

They are:

  1. Renegotiating repayments to make them more affordable (as mentioned above)
  2. Selling your asset and using some of the money to pay off the loan, keeping in mind any early repayment fees. This can be beneficial because it avoids any fees payable if the lender has to sell the asset for you. Moreover, having property repossessed can make it difficult to buy another one with a mortgage. 
  3. Using a debt consolidation loan

Considering other debt solutions – debt consolidation loan

A debt consolidation loan is a loan taken out to pay off multiple other debts. You may be able to find one of these loans with a lower interest rate than the secured loan you’re currently paying, and thus, make repayments more affordable. 

But there is a lot to compare and consider when consolidating debts, so you should seek debt advice first. There may be a better solution for you. 

Can I include my secured loan in a Debt Management Plan?

A Debt Management Plan (DMP) is a debt solution that merges multiple debt repayments into one monthly payment, often negotiating a reduced payment or a freeze on interest in the process. It can make debt repayments more manageable and cheaper, avoiding the need for the lender to take further action. 

Unfortunately, secured loans cannot be included in a DMP. This type of debt solution cannot include any type of secured loan, Student Finance debts or HMRC arrears. One of the other popular debt solutions for people on a low income, namely a Debt Relief Order, can also not be used against secured loans. 

Can you sell your house if you have a secured loan against it?

Many secured loans ask the individual(s) to use their property or home equity as collateral in a loan agreement. This means their property is at risk of repossession if they cannot keep up with loan repayments. 

But what if you have an outstanding secured loan against your property and you want to sell it? You could sell the property and use some of the funds to repay all of the secured loan, but you will want to keep in mind any early repayment fees within the credit agreement. 

If you are selling the home and moving straight into a new one (a purchase not a rental!), then some lenders will allow you to secure the new property or new amount of home equity against the ongoing loan. This can be somewhat complex and you should get advice before making any moves. 

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Where can I get free debt advice?

The UK boasts a selection of charities and groups willing to help people in debt with expert advice and personalised support. You can search for them in your local area or use a nationwide registered charity. 

Get in touch with one of the following debt charities for free and confidential debt advice:

  1. National Debtline
  2. Step Change UK
  3. Christians Against Poverty

You might also want to consider a debt management company, but these companies may be offering paid-for services that are free of charge through a debt advice charity. 

Can a secured loan be written off? (Quick recap!)

A secured loan could only be written off by the lender, which is not likely to happen even if you explain the reasons you cannot pay, and even if you declare mental health problems due to the debt. Nevertheless, there are strategies that can clear the debt in a more affordable way, such as selling your asset, negotiating a new payment plan, or using a debt consolidation loan.  

More secured loans information

If you have any other urgent questions about secured loans or getting out of debt, MoneyNerd has plenty of free guides and articles on these subjects. If you cannot pay back the loan, armour yourself with your rights to fight back against pushy creditors. 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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