A secured loan is one that uses an asset as collateral. For example, if you were to take out a loan that used your automobile for collateral, when you default on that loan, the lender has the right to repossess your vehicle, meaning that they take ownership of it.
Typically, you will get some type of notice that you are in default, giving you a bit of a “grace period” to make good on the debt. After all, you should keep in mind that lenders are in the business of collecting interest, not investing in automobiles or other bits of collateral you may have put up.
However, if you do not make the payments on your secured loan in a timely manner, you are putting a lot at risk. This is especially devastating when somebody puts up their home as collateral, which has the ability to compound the issue going forward. Not only have you destroyed your credit, but you may also find yourself looking for shelter.
An unsecured loan is one that you have put up no collateral to secure the debt. In other words, you were able to get financed through your credit history alone, or perhaps your employment history as well.
As a general rule, many loans have a grace period of at least 30 days, so although you would be late in your payment, you don’t enter the default phase. By the time you reach 90 days behind, the lender will probably start the collection process, moving the account into default status.
Quite often, your loan will be charged off, meaning that your bank will count it as a loss and delete the account from its books after six months. You still owe the money, but the bank will probably sell the loan to a collection agency or hire a debt collector who receives a percentage of the collected amount.
This is when the annoying phone calls and visits begin with debt collectors, because they have a financial interest in collecting on the bad debt.
After that, the charge-off will be sent to a lawyer, and then a collection attorney may take you to court after issuing you a letter calling upon you to pay the debt. The court can issue a judgment against you if the debt is considered to be valid, ordering you to pay the initial debt and, of course, the legal fees.
Once you get to this phase, and have a judgment against you, your default becomes a matter of public record. At this juncture, the creditor can put a lien on your house, or perhaps even ask a judge to garnish your wages, up to 25%.
Before Any of This Happens, Reach Out
Before you get into default on your loan, there are a multitude of things that you can do. The first and most obvious thing to do is reach out to your creditor and tell them that you are having issues paying the debt in a timely manner.
Make sure they understand that you fully intend to pay back the entire debt, but this temporary situation has put you into a hard place. Quite often, they will work with you by either giving you extra time, giving you a pass on paying the debt during that month, or even renegotiating the interest rates.
They don’t like doing it, because obviously, it cuts into the profitability of their business. However, it is much more profitable to get 80% of what they originally thought they were going to get as opposed to going through the entire process and spending all of that money to only sell the debt later and take much less for the account.
Obviously, you always want to pay your debts on time. Even if you need to get a second job temporarily, the most important thing you can do is pay your debt.
However, if you are open and honest with your creditors, many of them have programs in-house that can help you get back on your feet. Even with a secured loan, your creditor does not want to take possession of your house because they are not real estate agents. They want to be paid and only take your collateral as the last resort.
By “killing the monster while its small”, you can avoid a lot of problems down the road. In fact, if you compare personal loans, you'll see that some offer employment insurance. This means that if you pay just a little extra per month, you are covered in the case of a job loss.
This is just one example of how the credit industry is starting to understand that good people sometimes struggle. Make sure you reach out before any of the above actions are taken against you.