Lots of MoneyNerd readers have been asking how to get out of a secured loan.
We’ve revisited secured loans below before discussing what will happen if you can’t meet repayments – and what you may be able to do about it.
Waste no time…
Secured loans in a nutshell
Secured loans are a type of loan that makes the borrower use one of their assets as collateral within the loan agreement. This means the lender has a right to take and sell your asset if you do not keep paying your loan repayments as agreed.
There are various types of secured loans. Some use certain assets as collateral and they may have to be used for a specific purpose, such as debt consolidation or home improvements.
Avoid scams by only looking for secured loans that are from companies that are authorised and regulated by the Financial Conduct Authority (FCA).
How do secured loans work?
Secured loans work in a similar way to an unsecured loan. You will receive a lump sum amount and repay this loan through monthly payments that include a rate of interest. These payments will continue until you have paid back all of the loan, which may take a few months to over a decade, depending on the loan amount and personal finances.
You might be allowed to pay the loan off early, but you could incur an early repayment charge by doing so.
Are secured loans a risk?
Secured loans are considered a risk because your asset used as security is at risk of repossession if you do not make all your repayments. To mitigate this risk you should try to borrow as little as needed. This may involve saving more over many months or years so you only need to take out a lesser loan amount. Moreover, seeking a secured loan with attractive repayment terms can reduce the risk of the loan becoming unaffordable even further.
On the other side of the argument, these loans can provide more credit and sometimes a lower interest rate than unsecured loans.
Secured vs unsecured loan
The main difference between secured loans and unsecured loans is that an unsecured personal loan does not ask the borrower to use one of their assets as collateral in the loan agreement. Whereas a secured loan lender has the right to repossess a secured asset in a secured loan if you have stopped making payments, this is not the same for unsecured debt.
Arrears and debt from unsecured loans can still be chased. The lender will need to take the debtor to court and ask a judge for permission to enforce the debt. They could enforce the debt with enforcement officers, also known as bailiffs. These people could take your valuables and sell them as well. Thus, a similar end result could unravel by not paying your unsecured loan debt.
Does getting a secured loan affect your credit score?
Taking out a secured loan does not damage your credit score significantly. It may have a small effect on your score. Applying for too many loans in a short timescale can cause more serious damage to your credit rating.
Do you get your money back after paying off a secured loan?
You will not receive any money back after paying off a secured loan. Your payments are clearing the loan you received and you are therefore not entitled to any money back.
If your asset is repossessed and sold, only the outstanding debt balance will be taken from the money raised. If there is money left after the sale of the asset and the debt has been paid off, this money should be returned to you.
What happens if you default on a secured loan?
A payment default is when you have failed to make a single loan payment after receiving reminders to pay. If you default on a secured loan, the lender will record the payment default on your credit file, lowering your credit score. This can make it harder to take out a credit card, loan or mortgage in the future.
What happens if I can’t pay my secured loan?
If you cannot pay your secured loan and have accumulated a string of payment defaults, the lender has a right to repossess your asset used as collateral in the loan agreement. The asset is then sold, sometimes at an auction, and the money is used to clear all arrears and fees.
What to do when you can’t pay your secured loan?
If you have missed a secured loan payment, you’ve probably started worrying about what happens next. You can avoid having your asset repossessed and sold by communicating with your lender, explaining exactly why you have not been able to pay the money owed. Lenders would prefer to come to a mutually beneficial agreement rather than having to seize your asset.
This might mean changing interest rates, or lowering your payments but extending the repayment term. This could make repayments affordable and mean you pay back more in total, which benefits both you and the lender. You should also seek debt advice from a UK debt charity.
Can a secured loan be written off?
A secured loan can be written off if the lender agrees to do so, however, this is extremely rare and unlikely to happen. Unfortunately, secured debts cannot be included in a Debt Relief Order, which is one way to write off some debts if you are on a low income.
Can I include my secured loan in a debt management plan?
Secured loans are not covered by Debt Management Plans (DMPs), which is a type of debt solution for people with multiple debts they are struggling to keep on top of. Unfortunately, a DMP cannot include a secured loan, student finance debts or arrears owed to HMRC.
How to get out of a secured loan
So, how can you get out of a secured loan? There are a couple of options you may want to consider. The best option will depend on personal circumstances and your finances.
- Renegotiate your payments – as mentioned earlier, renegotiating your repayments may clear the path to get out of your secured more affordably without having to lose your asset.
- Sell your asset – you may decide to sell your asset yourself and use some of the money to pay off the secured loan and any other priority debts you have.
- Consider a debt consolidation loan – A debt consolidation loan is an additional loan taken out to pay off your existing debts, including priority debts. It merges debts together to make them manageable and the aim is to find a consolidation loan with lower interest.
Can I move if I have a secured loan?
If you have a secured loan using your property or home equity as collateral in the agreement, you might have to repay the whole loan before moving home. However, some lenders will allow you to switch the asset used as security from your old house to your new home or new amount of home equity (providing it is enough).
Of course, you will need to be buying the new home rather than renting it from someone else.
Need more help on how to get out of a secured loan?
If you’re struggling to pay any type of loan, you should seek free debt advice from a UK debt charity. MoneyNErd has already discussed some of the best options on our debt charity hub.