How do I deal with secured loan arrears?
I’ve missed one payment
- Contact your lender and make the payment as soon as possible.
- If you cannot afford the payment, create a budget to see if there are any areas where you could save money, to put towards your loan.
- Speak to your lender to ask if there is anything they can do to help. For example, they might offer you breathing space, a payment holiday, a reduced payment plan or waiver late payment charges. This is up to the lender’s discretion and your individual circumstances.
- Your lender will most likely want details of your incomings and outgoings to review what you can afford to repay. This is where your budget comes in handy.
- Missed or late payments are usually recorded on your credit file for six years - even if you’ve only missed one. But if you are a loyal customer and you are facing financial difficulty, your lender may agree not to register a negative marker against you. This is up to the lender’s discretion and would be classed as a gesture of goodwill, so there is no guarantee they will agree to this.
I’ve missed several payments
- Catch up with your payment arrears as soon as possible.
- Again, it is best to get in touch with your lender straight away to explain your financial situation. They need to make sure they are treating you fairly, based on your individual circumstances. They may be able to give you a payment break, reduce your repayments or prevent further action, for example. Again, this depends on their own discretion, and it can vary from lender to lender.
- Consider contacting a debt organisation like StepChange or Citizen’s Advice who can give you free debt advice or deal with your creditors on your behalf.
Will I lose my home?
You could lose your home if your loan is secured against your property, and you don’t maintain your repayments. But this is normally a last resort after the lender has made significant steps to recover the funds from you.
For instance, your account must have defaulted before they can take court action. If you are worried about losing your home, it is best to seek expert advice from an organisation like Shelter, or Housing Rights if you live in Northern Ireland.
What will the lender do if I miss payments?
If your secured loan is regulated by the Consumer Credit Act 1974, your lender needs to follow a set process to recover unpaid funds, as shown below.
1. Notice of arrears
Your lender should send you a notice of arrears letter if you miss two monthly (or four weekly) contractual payments on your credit agreement. This is a standard letter to let you know how much you owe and where you can get free debt advice. You will receive a further notice every six months thereafter, unless the debt is cleared in the meantime.
Your lender needs to send you a notice of arrears before they can issue you a default notice.
2. Default notice
Under the Consumer Credit Act 1974, if you have missed three to six contractual payments on your credit agreement, your lender should send you a default notice. This is a letter to warn you that your account is about to default due to missed payments. It will give you a grace period in which to catch up with your arrears (normally around two weeks) and will inform you what will happen if you don’t pay.
If you get up to date within this time, then your agreement will carry on as normal. But any missed payments will still show on your credit file for six years, which can affect your credit score and your ability to get further credit.
3. Default on your credit report
If you don’t catch up with your arrears after you receive a default notice, then a default marker will be registered on your credit report. This will stay on your records for six years, which can seriously affect your ability to get further credit.
When a default is registered, the full outstanding balance becomes payable at once, and your account may be passed out to a debt collection agency.
4. Court action
If you cannot maintain your secured loan repayments after your loan has defaulted, then your second charge lender may force you to sell your property.
They can then use the proceeds of the house sale to pay off your outstanding balance (once your mortgage has been paid first, as this is given priority over your secured loan). But there are certain rules that need to follow before they can take court action, as outlined by the housing charity, Shelter.
What is a payment default?
A payment default is a negative marker that lenders may apply to your credit report if you miss three to six repayments on a credit agreement. Before they can do so, the lender must send you a default notice, which is a formal letter stating that if you don’t clear your arrears within an allotted amount of time (usually 14 days), a default will be registered.
Once a default has been registered, it will stay on your credit file for six years. It can seriously affect your credit score and your chances of getting approved for finance in the future. Your lender may decide to pass your debt to a debt collection agency. They could take further legal action (such as a County Court Judgment) if you don’t pay.
Will a default appear on my credit file?
Yes. A default will appear on your credit file if you receive a default notice and don’t catch up with your arrears within the specified grace period.
Defaults stay on your credit file for six years, before they automatically drop off. If the debt is paid in full within this time, it will be updated to ‘default satisfied’ on your credit file.
Will my credit score be affected?
Your credit score will be negatively affected if you have a default on your credit report. It may reduce your score by around 350 points. This can affect your ability to get credit in the future, as bad credit can give lenders the impression that you are too risky to lend to.
However, there are some lenders who specialise in lending to those with less-than-perfect credit histories. Also, the impact it has on your credit score should lessen over time if you maintain your repayments on time, every time, going forward.
You can check your credit report for free with one of the three main credit reference agencies in the UK (Experian, Equifax or TransUnion). And find out ways to improve your credit score using our ultimate guide.
Can I get help with payments?
If you are in financial difficulty, your lender may be able to help you by reducing your payments or giving you a payment holiday. This depends on your lender and your individual circumstances.
What is the difference between delinquency and default?
A delinquency is when a payment is not made on time, i.e., a late payment. Your lender will normally charge a late fee for this. A default notice may be issued by a lender if you miss three to six payments.
Both late payments and defaults will stay on your credit file for six years and can affect your ability to get approved for finance.