Nsecured Loan To Secured Loan - How A Loan Company Can Convert Your Debt And Claim On Your Home
Below is a MRR and PLR article in category Finance -> subcategory Loans.
Converting Unsecured Loans to Secured Loans: How Lenders Can Claim Your Home
Summary:
Debt counseling charities are raising alarms about a growing trend where major lenders are using charging orders to convert unsecured loans into secured ones, potentially putting borrowers' homes at risk. Notable financial institutions such as Abbey, Alliance and Leicester, Bank of Scotland, Halifax, Lloyds TSB, Nationwide, and Northern Rock have acknowledged employing this strategy to recover debts.
Understanding the Shift from Unsecured to Secured Loans
When you take out a loan, it can either be secured?"meaning it's tied to your assets like your home?"or unsecured, where no such collateral is involved. Secured loans usually offer lower interest rates and higher borrowing limits due to reduced risk for the lender. However, some lenders are now using charging orders to turn unsecured loans into secured ones if borrowers default.
A charging order allows the lender to claim repayment from the proceeds when the property is sold. According to Fool.co.uk, this prevents you from selling your home without settling the debts associated with it, including mortgages and other secured loans.
The Legal Process
To secure a charging order, lenders must first obtain a county court judgment against you and you must fail to meet its repayment terms. While a charging order doesn't immediately ensure debt repayment, it does restrict the sale of your property without clearing the debt. In rare cases, lenders may even force a sale through legal channels, though courts typically hesitate to authorize such actions.
The Growing Use of Charging Orders
Currently, around 35,000 charging orders are issued annually, with numbers increasing steadily. The BBC reports that advisors believe marketing for loans and credit cards might need to include warnings similar to those associated with mortgages, indicating that missed payments could put your home at risk.
While it's reasonable for lenders to recoup lent funds, the essence of an unsecured loan is its lack of threat to your home. Peter Tutton of Citizens Advice highlights that banks may exploit this situation by charging higher interest rates on unsecured loans while reaping the benefits of secured collateral.
Malcolm Hurlston from the Consumer Credit Counseling Service warns that if this trend continues, government bodies like the Department of Trade and Industry or the Financial Services Authority should take notice. However, the latter claims it lacks the authority to intervene.
Protect Yourself from Charging Orders
With limited regulation currently in place, it's crucial to take steps to avoid becoming vulnerable to charging orders:
- Research and Compare Loans: Use resources like Moneynet to explore various loan options.
- Assess Affordability: Determine if you can afford repayments now and in the future using loan calculators.
- Understand Your Agreements: Read all loan documentation thoroughly.
- Communicate with Lenders: If you face financial difficulties, promptly discuss them with your lender.
- Seek Expert Advice: In serious financial situations, consult organizations like Citizens Advice for guidance.
Useful Resources:
- Moneynet Loan Comparisons: [Moneynet](http://www.moneynet.co.uk/loans/index.shtml)
- Financial Services Authority Loan Calculator: [FSA Loan Calculator](http://www.fsa.gov.uk/consumer/04_CREDIT_DEBT/loan_calculator.html)
Disclaimer: This article is for general information purposes only and doesn't constitute advice under the Financial Services Act 1986. Seek professional and legal advice before entering any contracts.
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