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September 08 2020

What’s the difference between unsecured loans and secured loans?

If you are considering taking out a loan, you will have a choice between an unsecured loan and a secured loan. A secured loan is fixed against an item and if the loan isn’t repaid as per the agreement then the item is taken back. Examples of secured loans are mortgages (secured against the property) and car finance (secured against the vehicle.) An unsecured loan is not fixed against an item, so there is nothing which can be automatically taken back if the terms of the loan. Examples of unsecured loans are credit cards and personal loans.

Which type of loan is right for you depends on your circumstances, how much you wish to borrow and what you want to borrow the money for. Secured loans are usually easier to acquire since there is less risk for the lender. If you are trying to rebuild your credit rating or if you have a poor credit history a lender is more likely to consider you for a secured loan than an unsecured loan. Interest rates also tend to be a bit lower and borrowing limits a little higher on secured loans.

Whichever loan you choose, you must consider affordability and ensure you can make the repayments without causing yourself additional financial difficulty. Consider the purpose of the loan and whether it is essential or whether a different type of finance might be more appropriate.

What if I can’t afford to pay my loan back?

Your individual circumstances will dictate your options, but you should speak to your lender as soon as you think that you might have a problem. If you have more than one loan, you might also consider prioritising your debts. You may feel it is best to pay down as much as you can on a secured loan to avoid losing whatever the loan is secured against (your car or home, for example.) However, you should also be careful in missing payments on an unsecured loan as there will be fees involved and interest rates on unsecured loans are usually higher and you could fall into more debt more quickly, making matters worse.

If you have more than one debt, you might consider consolidating these into one to help you keep a better track on your debt and potentially save you money. If you are worried about your financial situation you should do some research on the options which might be available to you, remembering that your specific circumstances will dictate which of these options you will be eligible for. If you are not sure which route to take following your research, you can contact someone for advice and debt advice charities offer this service for free.

Will I lose my house if I don’t pay back a secured loan?

If the loan is secured against your home, you risk losing it if you fail to make repayments as agreed. Otherwise, not paying back a secured loan does not necessarily mean you will lose your house. If you are having difficulty meeting payments on a mortgage, the best idea is to speak to your lender in the first instance. If you have not missed any payments in the past, then there could be options open to you, such as a payment holiday or moving onto interest-only payments for a short period to help you catch up.

If you have mortgage payment protection insurance, use it as unforeseen circumstances are the reason for having an insurance policy in the first place. Although this is a short-term solution, it can help you get back on track with your own finances by covering the whole amount which is due each month. If the situation is more serious, there is a scheme called Support for Mortgage Interest (SMI,) which will pay the interest on the mortgage for you, but if you are on a repayment mortgage you will have to find the rest of the monthly payment yourself. You should be aware, however, that the SMI scheme pays the interest in the form of a loan on which further interest is due and that you will need to pay back, so this could make the situation worse rather than better. Also, you are only eligible for SMI if you are receiving some other benefits.

Can whatever I purchased with the loan be taken if I can’t pay the loan back?

It depends on what type of loan it is. If you have a secured loan, then the item you bought with the loan such as a car or house can be repossessed. If you have an unsecured loan and you miss repayments, fees and charges are likely to be added to the amount you owe. Missing repayments will also affect your credit score and if you miss between three and six payments then the lender will issue you with a default notice which will be added to your credit report and may make acquiring credit more difficult in the future.

The default notice sets out the terms of your agreement which you have broken by missing the payments and tells you what you need to do next. The lender may get a county court judgement (CCJ) out against you, which you have 30 days to pay, or it will stay on your credit file for six years. CCJs can make it exceedingly expensive and sometimes impossible to secure further credit in the future. It is more difficult for lenders to force you to sell items to repay an unsecured loan, however, as a last resort, the lender could apply for a charge order which would have the loan secured against your property through the courts. This would then work in the same way as a secured loan, so you could lose your home if you do not pay the lender under the terms of the court order.

Can debt consolidation loans help me pay off loans that are too expensive?

The idea of a debt consolidation loan is to work out how much you owe on your existing loans and to apply for one new loan to cover the total amount. It should leave you with one monthly payment rather than several, meaning it is easier to keep track of your debt and it could save you money in lost interest. As with other loans, consolidation loans can be secured or unsecured and which type you are able to acquire will depend on your credit score as well as how much you wish to borrow. Consolidation loans are particularly useful in covering credit card, store card, personal loan and overdraft debt. As with everything, however, there are pros and cons and this course of action may not suit everyone.

Can I take a payment holiday if I’m having difficulty paying back my loan?

Payment holidays on mortgages, loans and credit cards are currently more widely since an agreement was made between lenders and the chancellor in March 2020 to assist those who may have lost income as a result of the coronavirus outbreak. Anyone applying for a payment holiday under this agreement will not be required to provide evidence to their lender of a reduced income or to complete an affordability test. The approval should also be fast-tracked meaning that a decision should be provided quickly.

This could provide much-needed help, but payment “holiday” may be misleading in terms of what this actually means. Payment holidays last for three months and during that time you are not expected to make a payment to your lender. However, interest still accrues during the holiday, so by the time your holiday comes to an end, you owe more than you did at the start. Before considering taking a payment holiday, it is worthwhile doing some calculations to find out the effect that the holiday will have on your payments once they resume. The interest which accrues and that you don’t pay during the holiday period will be spread over the remainder of your loan term, meaning your payments will be higher once the holiday comes to an end. Find out how much higher your new payments will be before deciding whether the holiday is worth it for your individual circumstances.

Can I legally write off my loans debts?

Some creditors will agree to write off all or part of your debts in some circumstances and you might be able to reach an agreement with them. In real terms, legally writing off all debts tends to mean either taking out an individual voluntary agreement (IVA,) which is managed by an insolvency company or filing for bankruptcy.

If you would like further information, please visit the DebtBuffer site at http://www.debtbuffer.com. DebtBuffer can help with writing letters to creditors to buy time and help you get fair treatment. There is also an AI chatbot you can use to help you understand your options with regards to your debt. The AI chatbot will ask you some questions to ascertain whether you may be eligible for one of a couple of possible debt solutions. This will help you gain a better understanding of your options and get your finances back on track.

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