What Happens If You Have Trouble Repaying a Secured Loan?
When you take out a secured loan, you must use property as collateral. For example, mortgages are backed by your home. Secured loans are often easier to get than unsecured loans because the lender takes less risk. However, if you default on the loan, the consequences are more severe. You could lose your home or other property if you do not repay your secured loan.
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Repossession
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If a loan is secured, it means it is backed by some property. Common secured loans are vehicle loans, which are backed by your vehicle, and mortgages, which are backed by your home. If you fail to pay the secured loan as agreed, the lender can take back, or repossess, his property. In many states, the lender can repossess a vehicle without going to court as long as he does so peacefully. Home loans are more complicated; lenders must go to court to file a foreclosure action before repossessing your home.
Refinancing
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If you contact the creditor regarding your difficulty repaying a loan, the creditor may make alternative arrangements rather than foreclosing on your home or repossessing your vehicle. Often, the lender does this by refinancing your loan. Refinancing is a process in which the lender cancels the old loan and creates a new loan agreement. Often, the lender lowers your monthly payment but charges you more interest so you will have to pay the loan for a longer period of time.
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Filing Bankruptcy
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If you are facing foreclosure and have other debts you cannot pay back as well, you might consider filing for bankruptcy. When you file for bankruptcy, the court usually grants an automatic stay, which bars your creditors from taking collection action against you until the bankruptcy is settled. This can temporarily stop foreclosure; however, mortgage lenders can ask the courts to lift the stay against them. If you file for Chapter 7 bankruptcy, you often have to reaffirm your mortgage to avoid losing your home. This means you have to continue paying your loan even after your bankruptcy is complete. Filing for bankruptcy has a negative effect on your credit for the next seven to 10 years, depending on the type of bankruptcy you file.
Avoiding Negative Consequences
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The best way to avoid repossession or other negative consequences of not paying your secured loan is to not take out any secured loans unless you have the money to pay them back. Before taking out a loan, write a budget and determine how much you can afford to pay each month. If your financial circumstances change after you take out a loan (for example, you lose your job), contact your creditor immediately to make alternative payment arrangements so you can avoid foreclosure or repossession.
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