Secured or second charge loans are one of the most accommodating forms of borrowing for homeowners with defaults. A default is a notice that appears on a borrowers credit profile when they have failed consistently to keep up repayments on a debt. However, many people have asked us what they actually mean, how they affect their credit score and what options are available if they need to raise further finance.
What is a default?
A default on a credit profile means that the lender has decided that the borrower is not going to pay back the debt so they are now ending the original agreement with them and will look into other means to recover the debt.
Different lenders have different rules on how many payments a borrower is allowed to miss before they will declare the debt as defaulted, though it is usually somewhere between three to six missed payments. They will notify the borrower the debt has defaulted with a default notice.
The default notice should include the following things:
- The type of agreement that was made
- The agreement terms that have been broken
- What should be done to put the account in order (i.e. how much to pay back and by when)
- What the creditor will do if the request isn’t complied with
- How long to respond (this should be a minimum of 14 days).
It should also include an information sheet from the Financial Conduct Authority with guidance on what to do and how to get free debt advice. If the debt is paid within 14 days then the account will carry on as normal but if not then the account will go into default.
How does a default affect credit score?
If a default is added to a credit account, then this will be logged on credit reports for a total of six years before dropping off. This will mean future lenders see the prospective borrower as a greater risk as they’ve previously failed to pay back a debt. Even if lenders do approve the application for credit, the borrower will more than likely be offered more expensive interest rates than someone with a “clean” credit history.
Getting a secured loan with defaults
As stated above, lenders can approve a borrower with a default but they may not get the best rates. However loans are available and they can be used for most purposes, including:
- Debt consolidation
- Pay for home improvements including extensions, renovation or home repair
- Buy a new car, boat, motorcycle or caravan
- Pay for a holiday, wedding or honeymoon
- Other purposes including paying for new electrical goods, jewellery or cosmetic surgery
If a default has only been recently added to the credit profile then a lender will pay more attention to this than one that has been on file for a couple of years with some lenders ignoring them from 12 months ago or more.
One of the main advantages of a bad credit secured homeowner loan is it can help to rebuild a borrowers credit rating. Once a secured loan is taken out, if it’s paid in full and on time, then this can help when taking out any new loans as it proves to these lenders the borrowers’ situation – and ability to manage their finances – is now improving, so it may be easier to borrow on more favourable terms.
In comparison to other methods of rebuilding your credit profile, a secured loan with defaults will also have a comparatively cheaper interest rate than an unsecured loan with defaults as the borrowers’ property is being used as collateral. Yet, this is also the main disadvantage of a secured loan with defaults as the borrowers’ home may be repossessed if repayments are not met.
Alternatives to a secured loan with defaults
Another option is a mortgage or remortgage. It is also possible to get a mortgage with a default but it is much more challenging than a secured loan so it is important to use an adviser who knows the entire mortgage market.
Similarly to a secured loan, it is easier to get a mortgage with a default where the default is for smaller amounts or occurred a long time ago. Also if the default is satisfied it can improve a borrower’s position greatly as it shows their credit history is improving.
‘Credit Builder’ cards
A credit builder card is a credit card designed to help build up a borrowers credit score. They are available to borrowers who might not be accepted for standard credit cards, and usually have high interest rates to reflect the level of risk a lender is taking.
However, if the balance is paid off each month then it is probable that no interest will need to be paid and over time, like with a second charge, your credit score will improve and also the card will be cheaper as the interest rate will decrease and the credit limit will increase.
There are plenty of options out there for people who have a default on their credit profile and they shouldn’t lose hope that they are unable to get the finance to achieve their goals, whatever they may be.
However, the best route is to avoid getting a default registered altogether. Speak to your lender and see if you can agree terms so the account isn’t defaulted. Once a default is registered it will most likely stay with you for the next 6 years, and despite our lenders trying to accommodate it, you will have more choice across the market if it didn’t exist at all.
Talk to one of our advisers on 01902 585020 and we can help you get the finance that you need.