Nsecured Loan To Secured Loan - How A Loan Company Can Convert
Your Debt And Claim On Your Home
Warnings have been issued recently by debt counselling
charities, regarding an increasing trend by some of the high
street lenders to issue "charging orders" on borrowers' homes in
order to recover bad debts. Major names in loan provision such
as Abbey, Alliance and Leicester, Bank of Scotland, Halifax,
Lloyds TSB, Nationwide, and Northern Rock have all admitted to
using these measures to turn an unsecured loan into one that is
secured against the borrower's house.
When a loan is taken out, it can be either secured against the
borrower's property and should repayment defaults occur then the
lender can still recover their money through the sale of the
property, or it can be unsecured so that no such guarantee is
offered by the borrower. Due to the obvious financial risk
advantages to the lender and the much lower default rates which
occur with secured loans when compared with unsecured loans,
increased borrowing limits and lower interest rates are usually
available for those who choose to opt for a secured loan.
Charging orders are a legal means of converting a loan that has
been taken out without the provision of securing that debt
against your house into one where the debt is secured against
your property. Having a charging order put on a house means that
when the property is sold and the mortgage is cleared, any money
that is then left over will automatically go to pay the
remaining outstanding debt. According to Fool.co.uk this means
that you "cannot sell your house until you've paid off your
mortgage, any second mortgage and other secured loans, plus the
amount due under the charging order."
It should be noted that before a court will consider an
application granting a charging order, the lender must have
issued a county court judgment against the debtor and the
borrower must have failed to make the required payments on that
judgment as agreed by the court. Also a charging order does not
of itself ensure that the lender gets repayment of the
outstanding debt but it does prevent the debtor from selling
their property without paying what they owe. The debtor is not
under any obligation to sell their property once the charging
order is put in place; however, there are some extreme
circumstances where it is possible for a lender to apply to a
court in order to force a sale. It is very rare for the court to
allow a creditor who has a Charging Order Absolute to sell your
home. It is up to the court to decide whether to make an Order
for Sale.
Currently the number of charging orders being issued is about
35,000 per year; however this figure is gradually rising.
According to the BBC, "Advisers say the practice is becoming so
common that the way loans and credit cards are being marketed
should change to include mortgage-style warnings that your home
may be at risk if you miss repayments."
Whilst most people would agree that lenders should be able to
recover the money lent, the whole point of an unsecured loan is
that it will not put the borrower's home at risk if future
financial difficulties are encountered and they cannot meet the
repayment schedule. Peter Tutton of the Citizens Advice
highlighted that the banks are also profiting from this practice
as they are still charging the higher interest rate of the
unsecured debt, "lenders are kind of getting it both ways, they
are getting the risk premium off the borrower, but they are
getting the security of the charge and that seems unfair."
Malcolm Hurlston of the Consumer Credit Counselling Service told
the BBC, that if the practice of using these orders to force
unsecured loans into secured loans increases at the current rate
then, "it's something that ought to attract the attention of the
Department of Trade and Industry or the Financial Services
Authority." The Financial Services Authority in turn stated that
they had no authority to intervene and that it was a matter for
the Department of Trade and Industry.
With the current lack of regulation covering the situation, the
best thing to do is prevent yourself getting into a state of
affairs where you could become subject to a charge order.
* Compare as many loans as possible using sites such as Moneynet
( http://www.money
net.co.uk/loans/index.shtml )
* Check your own financial situation - can you afford the
repayments now and do you expect to be able to meet all future
payments? Using loan calculators such as ( http://www.fsa.gov.uk/consumer/04_CREDIT_DEBT/loan_calcula
tor.html ) can help decide whether you can afford to take
out a loan.
* Read through all documentation and any agreements carefully.
* If you do obtain a loan, and later have financial difficulties
and miss repayments, immediately speak to your lender to discuss
the problem.
* If your financial situation becomes serious, contact Citizens
Advice or the Consumer Credit Counselling Service for free
expert advice on how to proceed.
Useful resources:
Moneynet loan comparisons ( http://www.money
net.co.uk/loans/index.shtml )
Financial Services Authority loan calculator ( http://www.fsa.gov.uk/consumer/04_CREDIT_DEBT/loan_calcula
tor.html )
Disclaimer:
All information contained in this article, is for general
information purposes only and should not be construed as advice
under the Financial Services Act 1986.
You are strongly advised to take appropriate professional and
legal advice before entering into any binding contracts.