Secured Loan Help & Advice

Living with unaffordable debt can be stressful, especially if the money you've borrowed is backed by an important asset like your home or car. However, while secured loans may be more accessible and offer lower interest rates, defaulting on a secured loan can trigger serious consequences. 

In this guide we'll explore secured loans in detail, including the most common types of secured loans, the differences between secured and unsecured loans, what happens if you fail to repay a secured loan, and the steps you can take if you're struggling with secured loan debt.

What is a secured loan?

A secured loan is a credit agreement where you use an asset - usually property - as collateral to secure the loan. This collateral then serves as a guarantee for the lender as they can recover their funds by repossessing the asset if you fail to repay. 

The nature of secured loans means that they're generally used to access larger loan amounts. They also tend to come with lower interest rates compared to unsecured loans. 

This can make them more attractive to borrowers, but they come with the added risk of potentially losing your home or vehicle if you don't pay. Lenders, however, perceive these loans as less risky as they have a tangible asset to seize in case of default, providing a level of security that unsecured loans don't have.

How does a secured loan work?

If you're considering a loan secured against an asset, like a mortgage, it's important to do your research to ensure you understand the application and repayment process, as well as the potential consequences of missing payments.

Secured loans work in a similar way to unsecured loans. Put simply, you borrow money and pay it back in instalments over the loan term, plus any interest owed. Some loans come with a fixed interest rate while others come with a variable interest rate, which can rise and fall throughout the duration of the loan.

The most important thing to remember is that, when you get a secured loan offer, you will have to volunteer a personal asset as security. In the case of a mortgage, this immediately puts your home at risk in the event you're suddenly unable to pay.

Before applying, it might be useful to compare secured loans across lenders. This can ensure you're confident about what you're entering into and allow you to access secured loans that are best suited to your circumstances.

Only apply for a secured loan if you're confident you'll be able to make your payments in full and stick to the terms and conditions agreed. Once the loan has been paid back in full, the lender no longer has an interest in the property.

The differences between a secured and unsecured loan

When it comes to borrowing money from a bank or another lender, you can typically choose between a secured or unsecured loan. Understanding the differences between these two types of loans is crucial to be able to make an informed financial decision.

Here is a brief comparison of secured and unsecured loans:

Secured loans

Secured loans, such as mortgages and car loans, are supported by collateral put forward by the borrower. This is usually a home, a car, or another valuable asset.

Having access to this collateral lowers the risk to the lender, which usually allows you to borrow larger loan amounts at lower interest rates.

However, failing to repay a secured loan can lead to the lender seizing the asset you have pledged to the arrangement. It's therefore essential that you understand the terms of a secured loan and the consequences of defaulting.

Unsecured loans

Unsecured loans like personal loans and credit cards, on the other hand, don't require collateral, relying instead on the borrower's creditworthiness. You can get unsecured business loans and personal loans.

While they offer flexibility and smaller loan amounts, unsecured loans generally come with higher interest rates. Defaulting on an unsecured loan can still have serious consequences, from credit damage to legal actions in the most severe cases.

Choosing between a secured and unsecured personal loan depends on your individual financial situation, your ability to keep up with repayments, and whether or not you are willing to use an asset like a home or a car as collateral.

Common types of secured loans

Secured loans come in various forms, each tailored to specific financial needs and circumstances.

Here are some of the most common kinds of secured loans available in the UK:

Mortgage or homeowner loans

Mortgages are perhaps the most well-known type of secured loan. When purchasing a home, it's unlikely you will have access to such a large sum of money upfront, so you take out a mortgage, with the property itself serving as collateral on the loan.

This allows you to secure a significant amount of money with which you can purchase the property, at a lower interest rate than if you were borrowing the same amount with an unsecured loan. You then repay what you owe over an extended repayment period, while the lender retains the right to repossess the property if you default on the loan.

Hire purchase agreements

For those looking to finance the purchase of a vehicle, hire purchase agreements are a common secured option. Under this kind of arrangement, the vehicle serves as collateral, allowing you to make fixed monthly payments until the full amount is repaid.

While you will have immediate access to the vehicle, ownership is usually only transferred after the final payment has been received. This arrangement provides a balance between securing the loan and being able to use the asset as if it's already yours.

Secured debt consolidation loans

Secured debt consolidation loans are designed to help people who owe debts to multiple creditors manage their finances more efficiently. 

By using an asset, often a property, as collateral, borrowers can consolidate various debts into a single, more manageable loan with lower interest rates. This not only simplifies the repayment process but can also reduce the overall cost of repaying the debt.

Is it easier to be accepted for a secured loan than an unsecured loan?

Secured loans are often considered more accessible for people with a poor credit history, who would otherwise find it difficult to be accepted for an unsecured loan.

The fact that you put up collateral against a secured loan gives lenders a level of confidence, lowering the risk associated with lending to people with less-than-perfect credit. For those with a history of financial challenges, the asset used as collateral, whether it's a home or a car, can significantly increase the likelihood of being accepted.

While secured loans may be more attainable for people with poor credit, it's important to note that the interest rates on these loans can still be influenced by the borrower's credit score, and people with poor credit may still face higher rates with a secured loan.

Can you pay off a secured loan early?

It's generally possible to pay off a secured loan early, but the rules around early repayment can vary depending on the lender, type of debt, and specific terms and conditions of the loan agreement.

Paying off a secured loan before the scheduled term can have advantages, but it also comes with certain considerations. On the positive side, borrowers can save money on interest payments, as interest is typically added over the loan's duration. Early repayment might also reflect positively on the borrower's credit history as it showcases responsible financial behaviour.

However, it's important to understand any penalties or fees that might apply to early repayment. For example, some lenders impose charges to compensate for the interest that they would have earned over the original loan term.

Before paying off a secured loan early, it's crucial to calculate whether the savings from early repayment would outweigh any associated fees.

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

Because secured loans are backed by collateral, such as property or a vehicle, they provide lenders with an added level of security. However, defaulting on these loans can trigger a series of consequences that impact the assets involved.

Here are some of the things that can happen when you default on a secured loan:

Late payment fees and charges

Defaulting on a secured loan often results in late payment fees and additional charges. Lenders may also impose penalties for missed payments, which can accumulate and increase the overall cost of the loan.

Similar to unsecured personal loans, where missed payments lead to penalties, the impact of defaults on secured loans includes immediate financial repercussions that can strain your budget and worsen your financial situation.

Damage to your credit score

Defaulting on any loan, regardless of whether it's secured or unsecured, will negatively affect your credit score. Your credit score reflects your creditworthiness, so missed payments or defaults signal a higher risk to lenders and can make it difficult to borrow money in the future.

A damaged credit score can limit your access to financial products like loans and mortgages and even if you're able to secure credit, it often leads to higher interest rates. It's crucial to rebuild a positive credit history after a default.

Potential repossession of assets

One of the most significant risks of defaulting on a secured loan is the potential repossession of an asset. If you repeatedly fail to meet repayment obligations, the lender will likely take legal action to repossess the collateral.

In the case of a mortgage default, the lender could initiate proceedings to seize your home and enforce the sale of the property. Similarly, failure to repay a hire purchase agreement is highly likely to result in your vehicle being repossessed.

I'm struggling with secured loan debt. What are my options?

Struggling to meet your secured loan obligations can be an overwhelming and stressful situation to find yourself in. However, there are several steps you can take to address unaffordable secured loan debt and work towards an effective solution.

If you're grappling with secured loan debt, here are some options to help you deal with it:

1. Get in contact with your creditors

If you find yourself unable to make payments on your secured loan, it's crucial to communicate with your creditors as soon as possible. Inform them about your financial challenges in as much detail as you can and clearly explain why you're having difficulty meeting the obligations. 

Many lenders prefer borrowers to be proactive in reaching out and may be more willing to work with you to find a resolution if you can prove you are actively trying to come to some sort of agreement.

2. Negotiate an affordable repayment plan

If your lenders are open to it, it might be possible to open a dialogue about an affordable repayment plan. 

Options to consider include the possibility of restructuring the loan, extending the repayment period, or even adjusting your monthly repayments to better align with your current financial situation. Many lenders will be willing to restructure the terms to help you manage the debt more effectively.

3. Seek professional debt advice

Consider seeking professional debt advice tailored to your financial situation. Many organisations offer free debt advice services to help individuals navigate their financial challenges, whether they're struggling with secured or unsecured debt.

Debt advisors can provide tips on debt management strategies, budgeting, and negotiating with creditors.

4. Consider a debt solution

Depending on the severity of your financial situation, it might be helpful to consider using a debt solution tailored to your needs.

Debt management solutions in the UK often focus on unsecured debt. However, options such as debt consolidation, Individual Voluntary Arrangements (IVAs), or debt settlement plans can be explored with the guidance of a debt advisor, and secured debts may be included in certain circumstances.

It's important to note that the impact of these solutions varies, and careful consideration and professional advice are essential before going ahead with a formal debt solution.