We appreciate that an individual’s circumstances can change and borrowers can find themselves in a position where they cannot afford to repay their loans. The important thing is always to speak to your lender to assess the different options available as avoiding any correspondence can lead to the emails, phone calls and letters piling up. Our guide below explains what happens if you cannot repay your loan.
You Will Be Contacted By Your Lender
As soon as repayment is due, your loan provider will be in touch and request repayment. Most bridging loan products are set up with a rolled interest repayment plan, so you are expected to repay the entire capital and interest compounded at the end of the loan term (i.e 12 months or 24 months). The loan vendor may contact you by phone, email or post and will following strict regulatory guidelines when it comes to the frequency of how often they will contact you. This will ensure that you will not be bombarded and have time to get your finances in order.
The priority when it comes to repayment is always on your first charge mortgage, which is your first property and likely to be where you live. All repayments from this mortgage must be clearly first and only then, will the collections be made for your second mortgage or second charge loan as it is called.
The biggest risk of taking out a secured loan is that you risk losing your collateral if you default on repayments. In the case of bridging finance, it is likely to be your property or development that you risk losing. The lender may cease your property and try re-sell it on the open market in order to recuperate their funds that they have lent out to you. It is for this reason that secured loans are typically charged at around 1-2% per month because there is that security in place for the lender. Unsecured loans by comparison are significantly more expensive because there is no collateral in place.
However, repossession for the lender is always a last resort because of the legal and administrative requirements involved. There is also the time lag of handing over the house and selling it which can take quite a while, so the lender would much prefer some kind of financial settlement. According to the Council of Mortgage Lenders, the number of property repossessions fell to 21,000 in 2014 (down by 26%) compared to 28,900 in 2013.
The best way to avoid repossession is to have a strong exit plan in place. For instance, you know that your building works will be completed by a certain date or you know that you will complete on your new property by a certain time and then you should be able to repay your loan, without risking repossession.
The bridging lender may charge you late fees for falling to meet repayments. This may comprise of a one-off default fee or additional interest for every day that the loan is not repaid – or both. To stop these fees from people charged, you can of course clear your balance or speak to your lender about a repayment alternative as per our suggestions below. Lenders may be able to freeze interest for a period of time or set up a later repayment date.
By contacting your lender and explaining your situation, they should be able to offer you forbearance and defer your repayment to a later date. This is actually very common for mortgages, whereby you can have ‘repayment holidays’ and skip the occasional month.
Of course, this depends on your relationship and history with the lender and the current circumstances. Perhaps you are still waiting to sell your property to repay the loan and the sale is imminent. The lender may be able to change the repayment date for a later date, possibly adding late fees because you are having the loan open for longer.
For some homeowners and developers looking to extend the length of their loan, they can always try come up with the cash to repay the loan and then refinance. This will allow them to raise money by using the existing equity in their property and if they can get a better rate from their new or existing lender, they can actually make a profit from their current deal. It is also known as remortgaging. However, one must be careful because you are still taking out more finance secured against your home or property and the interest will continue to accumulate.
Depending on the repayment method for your bridging loan, which could be monthly, rolled up or interest deducted, if you cannot repay the full amount, you can request a repayment plan from your lender. Although this may depend on the provider you are working with, they may be able to reduce the monthly or overall repayments into smaller and more affordable amounts which can be repaid over a longer period of time. This is also known as a ‘pay plan’ or ‘arrangement.’ More flexibility may be available if you have already covered a lot of the interest of your loan already.
Impact To Your Credit Rating
By falling to repay on time may have a negative impact on your credit rating. Regulated lenders will use credit checking and some non-regulated lenders too in order decide whether you are eligible for a loan. They receive this data through credit reference agencies like Equifax, Experian and CallCredit and will be required to feedback to them if your repayment has been successful or failed. This information is then accessible to future creditors who will consider you more creditworthy if you repaid on time or more risky if you have missed repayments. It is important for future creditors to know that you have some debt behind you because if they went ahead and offered you a new loan, it could put even further strain on your finance. If your credit score falls, it may be harder to access future finance and the rates you pay may be much higher too.
- Information will be reported back to other credit reference agencies
- Your credit score may fall
- It may be harder to obtain mainstream finance in the future
- You may be charged higher rates for standard loans and cards
Alternate Options For Paying Off Debt
There are other more drastic ways to pay off debts which should also be considered as a last resort. As explained by Gov.uk and MoneyAdviceService, these options including Individual Voluntary Arrangement, declaring bankruptcy, working with a debt management company or administration order. These methods can help remove your debt and will sometimes require going to court. However, their impact will leave a long-term mark on your credit file and this will make it extremely hard to obtain finance in the future.