The difference between secured and unsecured loans is simple and straightforward. Unsecured loans are loans that don’t require you to offer your property as collateral to pay back the debt. The best example of unsecured debt is credit card debt: If you default on a credit card payment, all a creditor can do is hassle you until you pay back your debt. They cannot take any of your property or claim any ownership rights to it.
Secured debts, on the other hand, require you to put up your property as collateral for the loan. As such, if you default, your creditor has recourse in the form of seizing your property. The best example of a secured loan is a car payment. In these cases, your car secures the loan and if you default, your lender will take possession of that property.
What do you do when you start to fall behind on your secured loan payments?
It can be scary to face losing property you own and worked hard to maintain. Nonetheless, that’s the reality if your loan is secured. Business owners who offer their business assets as collateral face the same fears.
Contact Your Lender Right Away
First and foremost, if you fall behind, you can delay losing your property by reaching out to your lender to discuss your options. You may need to contact a loss mitigation department. Either way, make sure you are upfront, honest, and frank and tell them you want to get caught up and work with them closely to pay off the debt. This is a good way to build rapport, keep yourself honest, and show your creditors that you’re serious about getting out of debt. This will make them much more likely to work with you or compromise if you ask to settle part of your debt later.
Act Swiftly
Missing a payment or two is one thing, but deliberately falling delinquent for six months is another entirely. Some lenders – many, in fact – will be somewhat forgiving of a temporary slip up, as long as you communicate with them and keep them in the loop. Once you inform your creditors that you’re working hard to get back on track, you can buy yourself time to figure out how to catch up.
If you’ve missed a payment, you may be able to catch back up by negotiating reduced payments with your other creditors and use the money you saved to get current on your car payments or other secured loan payments. You may also be able to consolidate your monthly payments, which would free up even more money to pour into your secured loan. Finally, you may be able to borrow money from friends or family to get yourself back on track, or even borrow against your retirement account or whole life insurance policy if you desperately need the cash.
Try to Settle
If you find that your unsecured debts are spiraling out of control and impeding your ability to pay down your secured debts, you can work with a reputable debt settlement company to negotiate a debt settlement on your behalf. We can help you work with your creditors to settle your unsecured debts through a payment plan that would be lower than the sum of the monthly payments you’re currently making, which would help you get caught up on your secured loan payments.
Keep that Car
Staying current on your car payments is vital, as companies that finance the purchase of cars can repossess vehicles without first seeking court permission. In many states, your lender doesn’t even have to give you advance notice that it’s coming to repossess your car. Do the best you can to manage your other debts, so you don’t uknowningly lose your mode of transportation – which can make it harder for you to get to work (only exacerbating your bad debt situation).
The Ultimate Key: Communication
If you’re having trouble making payments, the best move you can make is to contact your lender to see if it is willing to work with you. If not, you can either 1) reaffirm your loan, meaning that you can catch up by paying all of your past-due payments in one lump sum, or 2) you can “redeem” your vehicle or other repossessed property, so you can pay its current value in one lump sum.
