In the UK, personal debt is getting worse and worse. People who seek help from the Consumer Credit Counselling Service owe an average of GBP31,000, and this doesn't include mortgages.
We have all seen ads for debt consolidation companies on TV and in magazines. They say that if you are having trouble paying off your debts, they can give you a "easy solution." They say they can combine all of your debts into one simple monthly payment. They say they can do this so well that you may even have money left over each month.
That could be true, but they offer a service that is especially appealing to people whose debt has gotten out of hand and who are desperate to find a way out. The biggest problem is that the amounts involved are very large, and the Financial Services Authority does not oversee the loan industry in question.
The Consumer Credit Act only covers loans up to GBP25,000 per person, but most of these loans are well over that amount. This would have protected the borrower from unfair terms or high costs. This is especially important if the borrower is likely to pay back the loan early, since the lender can only charge the borrower one month's interest.
Since mortgage payments are not involved, the Financial Services Authority's protection is not available. This would have meant that the lender could only charge fees if the money was paid back early or if there were problems with the debt.
This means that borrowers who are desperate to get out of their situation may turn to unregulated loans, where they may be offered very long-term loans with long-term costs and likely rising interest rates, as well as high early repayment fees that make it impossible for them to get out of their situation early. People often sign contracts without reading the fine print. Those who are trying to solve urgent debt problems are more likely to do this, which means they are more likely to agree to payment terms they wouldn't normally consider.
It's hard to say whether or not you should get a secured loan. Carefully look at the terms being offered to see how well they fit your needs and your ability to pay.
There should be no question about it. If your house is the security for your loan and you can't pay it back as agreed, the house may have to be sold to help you meet your financial obligations. It's happened to a lot of people who own homes. After selling the house, you should have enough money to buy another house or, at the very least, pay rent.
You can talk to your lender to see if there is any way to make a deal that would allow you to keep your home, but unless the amount is very small, this is not likely to happen. So you'll have to think about what else you could do.
No matter what choice you have, the results can be traumatic. You basically bet a big chunk of the value of your property against your ability to pay back your loan, and you lost the bet. Downsizing will probably happen, and you may have to move out of your current area. Keep in mind that moving to a different area could make it harder for you to keep your current job.
Even though this paints a pretty dark picture, at least the risks are clear and easy to see. This shows that a secured loan is not an easy choice, and it might be best to avoid this type of loan if you can.
Even so, a study by Datamonitor says that loan advances will exceed GBP50 billion in 2008. This means that many borrowers feel confident that they will be able to pay their premiums when they are due.
