In the UK there are approximately 150,000 people with a secured loan (often called homeowner loans or second-charge loans), but these have been under fire recently and have been blamed for causing debt management issues.
These type of loans exist alongside your current mortgage but they are also secured against your house. This means that if you experience debt problems and you fall into arrears, the property acts as security for the loan – so it could be repossessed.
Secured loans have faced criticism recently by the Office of Fair Trading (OFT), which labelled them as being “high risk”. They said: “All businesses within this sector should act with appropriate regard to consumer protection and fair practices. Our latest guidance reflects this, and we expect all firms to comply with it.”
Does this mean that unsecured loans are a lesser risk then?
Even with an unsecured loan your property may be repossessed if the person who you borrowed from can obtain a coupl eof court orders. This isn’t guaranteed, that the court will grant the orders, but they’re not impossibly difficult for a lender to obtain.
Secured loans can also be very expensive, which is why they can often lead to debt problems developing.
If you are considering a secured loan to consolidate your debts, then there are other options available that mean you do not have to borrow more money. Professional debt management solutions, like an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP) or a Trust Deed may be a viable alternative.
Ivan Cooper, Chairman at debt management specialists Chiltern, said: “Secured loans can be an expensive way to borrow money and have faced criticism recently for presenting a higher risk to borrowers.
“Many are taken out by people who are desperately struggling with their debt problems, and who haven’t sought impartial debt advice. There are many other alternatives which could be better and could help overstretched customers get out of debt quicker.”
A Debt Management Plan (DMP) is a way of regaining control of your finances whilst still repaying all unsecured balances. DMPs make finances simpler by gathering multiple balances into one manageable monthly payment, which is based on your affordability. This means that the amount you pay each month will always be affordable, as it is based on your disposable income – the amount remaining each month once priority payments have been deducted.
With a Debt Management Plan (DMP), you make one monthly payment which is then distributed on your behalf to the people you owe money to. This simplifies finances, as you only need to pay once each month. Payments towards your debts are then rescheduled over a longer period of time, to mke them more affordable, which will be negotiated by the company providing your DMP.
If your situation changes and you no longer suffer from mounting debt problems, payments on your Debt Management Plan can be increased accordingly. Likewise if your situation changes for the worse and you receive lower income, it can be revised down so that it is still affordable.
An Individual Voluntary Arrangement (IVA) works in a similar way to a DMP, but it is repaid over a fixed period of time. The IVA involves a legally binding agreement with your creditors – which protects you from them chaning their payment demands.
Because the agreement is binding, a qualified Insolvency Practitioner is required to draft your IVA proposal and offer suitable IVA advice and support.
Once the IVA term has been completed, all remaining unsecured balances are effectively written off and you walk away debt free. This allows you to make a fresh start with your finances.
For immediate debt advice, or for more information on other debt management solutions, please call the number at the top of this page.
