Arrears on Secured Loans or Second Mortgages; What Happens Next?

A secured loan is when a debt is connected to an asset. The loans are most commonly to linked to the borrower’s property, and so you must own a property before you can obtain a secured personal loan. 

A secured loan linked to a property acts as a security blanket for lenders. With this said, if you fall into arrears on a secured homeowner loan, you can face some unpleasant repercussions such as home repossession. 

The amount you can borrow, the secured loan rates and loan duration are all dependent on your circumstances and the amount of free equity in your property. Free equity is the difference between your home’s value and the amount you still owe on your mortgage. 

Secured lending does have it’s benefits, however. For example, you can usually lend a much higher amount with a secured loan than a personal loan. Secured loans for bad credit are more accessible than unsecured, and repayment plans may be longer with a fixed monthly payment.

But, life happens, circumstances change, and sometimes, we might struggle to keep up with loan repayments. So, what happens when you can’t keep up with the repayments on your loan secured by your property?

Many people might be under the panicked misconception that one missed or late payment results in the repossession of your home. It doesn’t. However, this is an eventual possibility if this becomes a recurring issue. The lender of the secured home loan or secured mortgage must follow a specific set of steps and actions before they can declare repossession of your property. 

CONSUMER CREDIT ACT 1974

If your loan was taken out from April 2008 and it wasn’t used to purchase your home, the Consumer Credit Act should cover it, unless stated otherwise. 

If the Consumer Credit Act protects secured personal loans, lenders must issue a Default Notice and a Time Order before they can start repossession proceedings. Meaning, if you fail to keep up repayments on your secured loan, you will have extra time to find funds and rectify the situation. 

If you have a second mortgage or secured debt that ISN’T covered by the Consumer Credit Act, it is much easier for the bank or lender to repossess your home. 

If your loan was taken out before April 2008, it would be protected by the Consumer Credit Act if the loan or second mortgage was for less than £25,000. 

So, assuming your loan secured on your house is protected, here are the steps that your lender will have to follow: 

NOTICE OF SUMS 

In the unfortunate event that you fall behind on a second mortgage, personal or secured business loan repayments, the lender must serve you a notice of sums in arrears. 

A notice of sums is a statement from the lender stating that you have fallen behind with your debt or secured mortgage loan repayments.

Your lender can send a notice of sums in arrears within 14 days of the following events happening:

• You have missed two consecutive payments. For example, if fees are due monthly and two months have passed without payment
• Your total repayments are less than the total sum that should have been paid within the same time-frame
• The shortfall is the equivalent of two agreed payments

If you are due to make weekly repayments, you lender can send a notice of sums in arrears within 14 days of the following events happening:

• You have missed four consecutive payments. For example, if fees are due weekly and four weeks have passed without payment
• Your total repayments are less than the total sum that should have been paid within the four-week time-frame
• The shortfall is the equivalent of four agreed payments

Your lender should send a notice of sums every six months until the payments are cleared or the case is taken to court.

On the notice of sums in arrears, your lender should include helpful information such as how to manage your debt and where you can seek help or advice. You should also receive details on the next steps if you do not, or cannot, pay your arrears. 

Your lender cannot proceed to the next step of issuing a Default Notice until they have sent a notice of sums in arrears:

DEFAULT NOTICE

If your loan is covered by the Consumer Credit Act 1974, you must receive a default notice before the lender can begin repossession, end the agreement or demand early payments. 

A default notice should state details of all missed payments, a date which your arrears must be cleared by (at least 14 days away), and what will happen if you don’t meet this deadline.

The first thing you need to do upon receiving a default notice is to check that you have already received your notice of sums in arrears. Remember, without the notice of sums, the lender is not allowed to issue a default notice. 

Upon receiving your default notice, providing you have already had your notice of sums, you have a few options. 

1. Clear your arrears within the time limit, which must be a minimum of 14 days away 
2. Contact the lender to arrange an affordable and realistic arrangement for repayments
3. Seek advice from external organisations 
4. Apply for a time order

TIME ORDER

If you have received a notice of sum and been issued with a default notice, you can apply for a time order if you are struggling to make repayments. 

A time order is valid for secured loans or second mortgages, and you can only apply for one if you have received your notice sum in arrears and default notice. 

A time order gives you extra time to pay off your secured loan arrears. The possible outcomes of applying for a time order are:

• Permission to pay the loan and arrears in affordable instalments
• Receive a reduced interest rate to make secured loan payments more manageable 
• Have a loan extension to allow for smaller repayments over a prolonged time
• Receive an extended deadline to clear your arrears