A secured debt may be the way to unlock larger loan amounts and get competitive interest rates – but it does come with additional risk.
Learn everything you should know about secured loans here. From interest rates to defaults, we cover all bases regarding secured debt.
What is secured debt and unsecured debt?
It is important to understand the difference between secured debt and unsecured debt. A secured debt requires the borrower to use an asset as collateral within the credit agreement, which may be a house, car or even home equity. On the other hand, an unsecured debt does not require the borrower to use their assets as collateral in the credit agreement.
Secured debt usually refers to a type of secured loan, whereas an unsecured debt may refer to unsecured personal loans, credit cards and store cards.
What does it mean when a debt is secured?
Secured loans will require the individual to use an asset as security in the agreement – but what does this really mean?
When a debt is secured, it means that the lender can repossess and sell this asset if the borrower is failing to make payments as agreed in the credit agreement. The lender will not seize and sell the asset after one missed payment, but if continuous payments are missed with no communication they will progress to take the asset used as collateral.
Readers should also be aware that not paying back an unsecured debt can also lead to having valuables and assets repossessed.
The lender can take the debtor to court and ask a judge to enforce the debt using bailiffs or other means. The bailiffs, also known as enforcement officers, can come to your home and take valuables to be sold at auction to recover the money owed. The process is long-winded and more expensive compared to repossessing assets as part of a secured debt.
Is it easier to get approval for secured debt?
In comparison to unsecured personal loans and credit cards, a secured debt may be somewhat easier to get approval for. Using an asset mitigates your lending risk and makes lenders more comfortable to lend to you. However, applications for secured loans must still pass affordability tests and your credit history will still need to be checked.
Does secured borrowing offer lower interest rates?
Secured loans usually offer lower interest compared to unsecured debt, but this is not guaranteed. The interest rate you are offered will depend on personal finances and your credit history. Someone with an excellent credit score could get a better interest rate with unsecured credit compared to someone with bad credit using a secured loan.
Secured loans also generally offer the chance to take out more credit because the asset reduces perceived lending risk and makes it easier for the lender to recover larger sums of unpaid debt. If the debt is secured with home equity, the loan may allow you to borrow against a percentage of your home equity which might be a substantial amount.
Which assets can be used to secure a debt?
The most common assets used to secure a debt are property and vehicles. You can find some secured debts that use other assets, but these are less common. When the debt is secured with an asset, that asset can still be used by the individual. For example, you can still live in your home or use your car when it is being used as collateral in a credit agreement.
What happens if you do not pay back a secured debt?
If you do not pay back a secured loan, the lender will first write or call you and ask you to pay immediately. If you ignore this notification they will send you a final reminder. You may even have to pay late fees at this stage.
If you continue to ignore the lender’s correspondents, they will register a default on your credit report, making it harder for you to get a credit card or loan in the future. If further defaults are recorded, the lender will initiate the process of repossessing your asset used as collateral.
The asset is then sold, often at an auction, and the money is then used to pay off all arrears and fees. Any remaining money will be given back to the debtor. If not enough money is raised from the sale, possibly due to the asset decreasing in value (most likely the case with property), then the debtor will still need to pay the shortfall. This might even lead to filing for bankruptcy.
The pros of secured debt
- Access to larger loans – secured debt typically enables borrowers to access a larger loan amount, which can be useful for purposes such as home renovations.
- Competitive interest rates – by using an asset as collateral, secured loan providers can usually offer competitive rates.
- Variation and accessibility – there are a wide variety of secured loans (see the end of our guide) and these are advertised widely in the UK
The cons of secured debt
- Asset at risk – the asset you use to secure the debt is at risk of repossession. Even if you think the loan is affordable now, situations can change and it may become unaffordable.
- Appraisal fees – the asset you want to use as collateral may need to be valued to determine how big of a loan you can get (e.g. home equity loan). This could come at a cost you need to front.
- Additional costs – there could be further costs associated with a secured debt, such as admin fees and closing costs.
Should I take out secured debt?
Taking out a secured debt may be a good idea, especially if you’re looking for a larger loan amount than what is offered through unsecured debt, or if you just want to find a lower rate of interest.
However, you should fully understand the risks involved when taking out a secured loan. There may be other credit options available. Each person is different and the decision should come down to personal aims and circumstances. To seek clarity on your own situation, you could speak with a loan broker or financial advisor.
Can you get secured debt with bad credit?
It may still be possible to take out a secured debt with a bad credit rating. By using an asset as collateral and reducing perceived lending risk, lenders that may have rejected you for unsecured credit may be more willing to lend to you through secured debt. However, this is not guaranteed and you may have to pay a higher rate of interest.
Readers should also be aware that some lenders advertise secured loans specifically to individuals with an unsatisfactory credit score.
Can secured debt be written off?
Secured debt can only be written off if the lender agrees to it, which is highly unlikely given they can easily recover the debt by seizing and selling your listed asset.
Instead of asking them to write off the debt, you should try to negotiate a new repayment structure that is more affordable. By agreeing to pay less for longer, your payments could be lower but you can pay back for longer. Lenders are willing to negotiate to avoid having to repossess your asset.
Alternatively, you may want to consider suitable debt solutions.
Is a car loan a secured debt?
A car loan could refer to a loan secured with a vehicle, but it more likely refers to car financing, which is an agreement to pay off a new car over a period of time through monthly payments.
A car finance company offers a type of secured debt because the loan is secured by the car and can be repossessed if payments are not met. Interestingly, in some situations, borrowers can return the car if they cannot afford repayments any longer.
What is a secured loan?
Throughout this guide, we have referred to secured loans. But there are in fact many types of secured loans. Some use specific assets as collateral and others must be used for specific purposes. For example:
- A home improvement loan may be secured with property and must be used to complete home improvements.
- A debt consolidation loan might be secured with a car or property and must be used to consolidate existing debts.
- A home equity loan is secured with home equity and can be a significant loan amount. It can be used on anything the homeowner wishes.
It’s good to understand the wide variation of secured loans in the UK.
How do secured loans work?
Most secured loans provide a lump sum that is repaid over a fixed period of monthly payments. There are some secured loans that are provided in other ways, namely over a draw period as in a home equity line of credit (HELOC).
Each secured loan has differences and they should be researched individually to understand how they work in full.
Additional information on secured borrowing
For more help and information understanding secured debts, choose from an array of related guides and articles here at MoneyNerd. We have articles covering all aspects of secured debt with simple examples and top tips. Read more soon!