Secured Loans â “ the Danger of Missing Repayments

When we take out a loan, most of us tend to focus on the immediate need for credit rather than the nature of the product itself. As long as the monthly repayments look cheap enough, thatâ ™s enough.

Many of the cheapest loans are those secured against existing assets. Hardly surprisingly, a significant proportion of borrowers base their applications purely on price â “ which makes secured loans a favoured option. In other cases, a secured loan is the ONLY option for people who might have a poor credit history

The danger comes, however, when people are unable to repay their secured loans.

According to the debt charity Credit Action there was a total of £1,163bn in outstanding debt secured against UK homes at the end of September 2007. Much of this was standard mortgages. But a significant proportion was additional debt secured on a home.

It is therefore, easy to understand just how big a business secured lending is, and why lenders go to great lengths to ensure that their loans are repaid.

Secured loans are a long-term commitment, with most terms lasting 25 to 30 years. As a result, the possibility exists that you may slip into some unforeseeable financial difficulties during this period, which renders you unable to make the required monthly repayment.

If this happens to you, donâ ™t panic. Get in touch with your lender as soon as possible. This will show the lender that you are aware of the situation and wish to take steps to resolve it.

It is very rare for lenders to foreclose on the loan if you miss just one payment. On the contrary, they will be more eager to hear why this has happened, and help you come up with steps on how to resolve this problem.

It is vital, however, to realise that missing just one payment is not the same as missing two, three or more consecutive payments. The longer the repayments are left unpaid, the more anxious the lender becomes. This will be reflected when you start getting an abundance of letters and calls concerning the loan.

With just the one outstanding payment, it is crucial that you use any surplus finances on clearing that outstanding payment. If you donâ ™t have the funds to cover the payment, as is often the case, then contacting the lender so a solution can be found is the next best option.

For instance, the outstanding payment could be added to the end of your loan, or paid in instalments over the next few months.

If the above options are not feasible, then refinancing may be another solution. This generally involves extending the length of the loan, thus reducing monthly repayments and making them more manageable. The downside with this option though, is that you are tying yourself into a longer contract and you will ultimately end up paying more interest.

In summary, secured loans can be and generally are a viable option for homeowners requiring substantial amounts of cash and can be used for a wide range of purposes.

Itâ ™s vital that the loan is only taken if the required monthly repayments can and will be met. If you are unsure as to what to do, it may help to talk over your options with an independent financial adviser, or IFA, before making a final decision.