Unsecured 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
* 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 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.
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.
Useful resources:
Moneynet loan comparisons
Financial Services Authority loan calculator
