A secured loan is a loan taken out with your home as collateral. Secured loans often come with lower interest rates than unsecured loans like credit cards, but can lead to lenders coming after your assets if you’re unable to pay.
In this article we examine the secured loan – what it is, how it works, how people fall into secured loan debt, and where to find the debt help you need.
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What is a secured loan?
A secured loan is a loan attached to your home – giving lenders the ‘security’ they need to allow you to borrow money. The main difference between this secured debt and other types of debt is that, if you fail to keep up with loan payments, the lender has the power to force you to sell your property in order to repay what you owe.
Secured loans are useful when you need help raising a large sum of money you can’t get any other way. Some people might use it to make home improvements, others to support their children through university, or even for debt consolidation – using the loan secured against their property to pay off other types of debt.
How does a secured loan work?
The way secured loans work is similar to accessing other forms of credit. You will apply to a lender, like a bank or building society, and they will offer you a loan amount with interest rates attached.
The big difference between this and an unsecured loan, however, is that the credit lender will use your property as collateral. That means you will have to offer your house as security, in the understanding that failure to pay your secured debt might result in you being forced to sell your property.
A secured loan is like a second mortgage, and is often used by the borrower to make home improvements. If the borrower buys a home that needs work, they might take out a loan with the mortgage lender to purchase the property, then take out another – with the property as collateral – in order to furnish and decorate it.
That’s why a secured loan is often called a second charge mortgage. In the above scenario, the borrower would face a double repayment – the first to repay the mortgage they took out to purchase the house, the second to repay the loan they took out to renovate it.
Benefits of secured loans
Offering your house as collateral is a risk, so it’s not always immediately obvious what the attraction of this type of loan is. The main benefit? Lower interest rates.
Loans secured against a property come with a lower interest rate than unsecured debt. The borrower is taking on much of the risk themselves, meaning the risk to the lender isn’t as high. This usually allows them to offer some form of discount on the interest.
More generally, this type of loan allows people to generate large sums of money they wouldn’t be able to raise elsewhere. The additional security provided by a high-value asset like a house empowers people unlikely to qualify for a personal loan – i.e. those with bad credit – to access the credit they need.
Dangers of secured loans
If you fail to keep up with payments, your secured loan provider can take all the normal debt recovery routes to force your hand, including using debt collectors, sending threatening letters, and persistently contacting you. It can also impact your credit score, affect your credit history long term, and cause you high levels of stress.
The most obvious danger of secured loans, however, is repossession of your property. As the borrower, you are offering your home as a guarantee that you will repay what you owe. If you fail to do so, you can expect the company to initiate court action forcing you to sell.
Even if your home or another high-value asset is taken, this doesn’t always mean the debt is settled. In cases where the money raised from selling the property doesn’t cover the outstanding balance, the company can still take you to court to get the rest of their money.
What happens if I default on a secured loan?
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, you should seek debt advice. There are many debt support companies that can offer you free debt advice, personal finance reviews, or a formal debt solution that could slow down or stop the repossession of the asset.
How to keep 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:
Most payments to secured loans are a set amount, at least for a 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.
Prioritise secured debts
Even if you are struggling to pay off multiple debts, it’s smart to make sure you pay any secured debts you have first. This way, you’re less likely to reach the stage where your belongings are seized.
Speak to the people you owe money to
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 do I get help with secured loan debts?
Dealing with secured loan debts can be a challenge, as it’s easy for them to get out of hand. Facing the prospect of a bank or other lender coming after your home, many people turn to credit cards and other forms of unsecured debt as a way of repaying what they owe in the short term – making their long term situation even worse.
IVA Plan has years of experience offering help and advice to people struggling with secured debt. Our friendly debt specialists can offer you free debt advice and support, help you regain control of your debts, and even place you on a debt repayment plan that will protect your assets.