How to Get Out of a Secured Loan

Taking out a secured loan can seem like a good idea at the time You get access to funds at a lower interest rate compared to unsecured loans, since the lender has collateral they can seize if you default. But what happens when you want to get out of that loan obligation? Maybe your financial situation has changed and the payments have become unaffordable Or you no longer want to risk losing the asset tied to the loan. Whatever the reason, you have options to pay off a secured loan early and move on.

Understand How Secured Loans Work

Before we dive into ways to get out of a secured loan, let’s review what makes these loans unique. Secured loans require borrowers to pledge an asset as collateral for the debt. Typical collateral includes cars, homes, retirement accounts, or investment accounts. The lender places a lien on the asset, meaning they have a legal right to repossess and sell it if the borrower stops making payments.

Lenders offer lower interest rates and more flexible qualification standards on secured loans compared to unsecured alternatives like personal loans or credit cards. That’s because the collateral reduces their risk – they can recoup the unpaid balance by taking the asset

But this structure creates risk for borrowers. Defaulting on a secured loan means potentially losing a valuable asset. So it’s important to have an exit strategy if your financial situation changes after taking out one of these loans.

Continue Making Regular Payments

The simplest option is to continue making your scheduled loan payments on time and in full until the debt is paid off. This maintains your good standing on the loan and avoids late fees or credit damage As long as the payments still fit reasonably within your budget, sticking to the original loan terms is usually the best approach

Make payments automatic if you can, either by setting up autopay through your lender or scheduling recurring transfers from your bank account. This prevents accidentally missing a payment if money is tight one month.

If the payment has become unaffordable, look for ways to cut back spending in other areas of your budget temporarily to come up with the funds. Downsizing housing, reducing transportation costs, or trimming discretionary expenses could free up money to cover the loan payment.

Negotiate Alternative Repayment Terms

Another option is to negotiate with the lender for modified repayment terms that better fit your current financial situation. This may mean lowering the monthly payment amount, extending the loan term to reduce the payment, or deferring payments temporarily.

The first step is contacting your lender’s customer service department and explaining that you’re having trouble keeping up with payments. Be prepared to provide details on your income, expenses, and what you can realistically afford going forward.

Don’t wait until you’ve actually missed payments, since you’ll have more leverage to negotiate before defaulting. Lenders want to avoid taking collateral since selling it comes with costs and uncertainty. So they have incentive to work with borrowers who proactively seek alternative arrangements.

Here are some potential modified terms to request:

• Lower interest rate – This directly reduces the monthly payment. Rates on secured loans are usually quite low already, but it’s still worth asking.

• Longer repayment term – Stretching out the payments over more months makes each one smaller. Be aware this increases the total interest paid over the life of the loan.

• Payment deferral – Some lenders may allow a temporary pause in payments of 1-3 months if you’re experiencing a short-term hardship like job loss or medical emergency. Interest still accrues during this time.

• Hardship program – Lenders want to keep accounts in good standing. Ask if they offer structured programs with modified terms for borrowers facing financial challenges.

• Partial payments – Making smaller payments for a period of time may be possible if a job loss or other issue has significantly reduced your income. This should be a last resort since the unpaid interest gets tacked on to the balance.

The lender will likely want updated details on your finances to evaluate any modified repayment proposals. Be cooperative in providing information to improve the chances they’ll work with you.

If you and the lender can’t agree on new terms, moving forward with one of the next two options may become necessary. But negotiating is always worth trying first before resorting to more drastic measures.

Sell the Collateral and Pay Off Loan

If reducing or deferring payments isn’t feasible, another option is to sell the asset tied to the loan and use the proceeds to pay off the balance. Of course this means parting with a valuable item you pledged as collateral, but may be the best financial decision in some situations.

This path can provide a few benefits:

• Avoid further high interest charges by paying off loan early
• Eliminate the monthly payment from your budget
• No longer risk the lender seizing and selling the item if you were to default

Follow these steps to sell collateral and pay off the debt:

1. Determine payoff amount – Contact lender to get exact payoff figure including any fees. This may differ from remaining principal balance.

2. Assess collateral value – Research what the asset would sell for in the current market. Get professional appraisals for homes or vehicles.

3. List for sale – Price realistically based on market value and condition. Consider using a broker, dealer, or auction company that specializes in selling the type of collateral.

4. Close sale – Once you have a buyer, the lender will handle releasing their lien so title can transfer. Don’t hand over the asset until you have the payoff amount in cash.

5. Send payoff funds – Instruct the escrow company or closing agent to pay the lender immediately so the lien release happens on schedule.

6. Confirm account closure – Follow-up to ensure the lender received the payoff funds and closed your loan account.

Selling large assets like a home or car on short notice is not always easy or ideal. But when facing severe financial hardship, liquidating the collateral and eliminating the debt may be the best long-term option compared to ruining your credit through default or eventual repossession.

Explore Alternatives Before Defaulting

Defaulting on a secured loan should only be a very last resort since it damages your credit, can result in collection calls and lawsuits, and risks surrendering a valuable asset. Always first pursue the other options covered in this article, including:

• Continuing to make payments in full and on time, even if it requires budget sacrifices elsewhere temporarily.

• Contacting your lender to negotiate modified repayment terms that make the payment more affordable based on your current financial details.

• Selling the item pledged as collateral, if needed, to pay off the loan and release the lien. This removes the payment obligation and liability risk.

But if all else fails and default is unavoidable, be proactive in dealing with the consequences. Here are some tips:

• Communicate with your lender to see if they will work with you on a structured repossession process rather than using third-party collectors. This can save on fees and minimize credit damage.

• Research consumer protections in your state related to debt collection practices following loan defaults. Know your rights.

• Consider consulting a credit counselor or consumer lawyer on the best approach once default is imminent. They can review your situation and provide guidance tailored to your specific circumstances.

• Start setting aside funds to cover increased costs after losing the collateral. For example, if defaulting on an auto loan, you’ll need transportation alternatives like public transit or ride shares.

While defaulting on a secured loan should not be taken lightly, it is not necessarily the end of the world or permanent financial ruin. With proactive planning and a responsible approach, you can recover and rebuild credit over time. The most important thing is making the decision that’s right for your personal situation.

Explore All Options Before Walking Away

The takeaway is that multiple options exist for getting out of a secured loan if the obligation has become burdensome. Before considering surrendering collateral or damaging your credit through default or bankruptcy, be sure to first exhaust alternatives like:

• Continuing payments as normal, even if it requires temporary lifestyle adjustments
• Negotiating modified repayment terms with your lender
• Selling the asset and repaying the debt to release the lien

Don’t hesitate to seek guidance from reputable credit counseling agencies or financial experts either. They can provide an unbiased third-party review of your total financial picture and loan specifically. Their input may reveal options you haven’t considered.

Taking the initiative to deal with secured loan debt proactively, whatever the resolution ends up being, can help secure your financial future.