What happens if you default on a secured loan? 

If you already have a secured loan but are struggling to make payments as agreed, you should understand what can happen – and what you can do to prevent the worst. 

Keep reading to learn what happens if you default on a secured loan. 

What is a secured loan?

A secured loan is a term used to describe different types of loans. Secured loans may have different purposes, but they are all the same in that the borrower uses an asset as collateral within the loan agreement.  The opposite is an unsecured loan, which does not use assets to secure the loan. 

Secured loans may allow you to borrow more than what unsecured loans can offer. 

How do secured loans work?

These loans typically provide the borrower with a lump sum payment which is repaid with interest over a fixed timeframe. Interest rates applied can differ from person to person and lender to lender.

If you repay the loan early you may have to pay an early repayment fee. But if you struggle to repay the loan because your financial circumstances change, then the lender can seize your asset and sell it to recover the money owed to them.

They won’t do this if you have missed one payment and are going to put it right quickly. 

What is a payment default?

If you miss one payment on your loan, the lender will send you a reminder asking you to pay immediately. If you ignore this and any subsequent reminders, the missed payment will be recorded as a payment default. 

In simple terms, this is a failure to make a payment on your loan and keep to your legal loan obligations. This definition also applies to debts on credit cards.

What happens when you default on a personal loan?

When you default on any type of loan, the lender will record your default on your credit file so other lenders are aware that you have not been able to stick to a credit agreement. What happens next will depend on if you’re defaulting on a secured loan or an unsecured loan. 

What would a lender do if you default on a secured loan?

So, what happens when you default on a secured loan? The answer is the lender will continue to chase you for repayments. You should contact your lender to discuss the situation at this stage. 

If you do not respond to their request for payment and more defaults materialise, only then will they look to repossess your asset used as collateral and sell it. They do not decide to repossess assets after just one default and will usually be open to a working solution for both parties. 

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

If you do not pay your secured loan after multiple defaults and no solution, the lender will probably continue to repossess your asset used as security and then sell it. 

The money raised will be used to pay back the loan amount in full plus the interest rate you agreed to and any late charges that have been applied on your arrears. There may even be administration costs to pay from the money raised as well. 

The sequence of events will be recorded on your credit report for six years. 

Can I lose my home due to secured loan arrears?

You can lose your home if you are unable to repay a secured loan debt when the loan has been secured with your home or with home equity. Some examples include generic personal loans secured with a property, home equity loans and first or second charge mortgages. However, repossession of a home is usually a last resort even when you borrow money through a secured loan. 

If there is another debt tied to your home – such as an existing mortgage – the mortgage lender will get priority over any funds raised from the sale. Anything remaining can be collected by the secured loan lender, and anything remaining will be the ex-homeowner’s money to keep. 

A secured loan against a different asset will not cause you to lose your home, but it can cause you to lose the asset you used as collateral.

Will my credit score be affected?

Each loan repayment default will be recorded on your credit report and will cause your credit score to deteriorate. If the debt does not end up being paid back at all, this will cause your credit score to decrease further. These events remain on your credit file for six years and can prevent you from getting other secured loans, unsecured loans or even a credit card. 

How to deal with secured loan arrears?

If you have missed loan repayments and are unsure what to do, the first step is to contact your lender and explain the situation. Most lenders are willing to work with you and come up with a solution that doesn’t lead to the repossession of your home or asset. This may look something like smaller loan payments but for longer, meaning you end up paying more back than originally agreed. 

If you cannot come to an agreement with the lender directly, you may want to consider one of the many debt solutions. These solutions could help you with this and any other debts you have, with some solutions enabling you to block contact and possibly write the loan off in time. 

Can you get out of a secured loan?

A secured loan debt can only be written off if the lender agrees to write it off. This is highly unlikely, especially when your listed asset makes it much easier for them to recover the debt in comparison to an unsecured loan. 

If you want to avoid your asset being repossessed but cannot make repayments as originally agreed, you should follow the guidance mentioned just above and consider speaking with a UK debt charity group. 

Get FREE debt advice

If you are dealing with missed payments on your secured loan and need support, there are a handful of excellent debt charities that can help. Their advisors can provide you with confidential support and guidance to clear a path out of your debts. 

Consider speaking to a debt charity like Step Change or National Debtline today – it’s completely free! 

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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