Debt counselling groups have recently issued warnings about a growing trend among some high street lenders to put "charging orders" on borrowers' homes in order to get back bad debts. Major loan companies like Abbey, Alliance and Leicester, Bank of Scotland, Halifax, Lloyds TSB, Nationwide, and Northern Rock have all admitted to using these tactics to turn an unsecured loan into one that is secured by the borrower's house.
When a loan is taken out, it can be secured against the borrower's property, which means that if the borrower doesn't pay back the loan, the lender can still get their money back by selling the property, or it can be unsecured, which means that the borrower gives no such guarantee. Due to the obvious financial risk advantages for the lender and the much lower default rates for secured loans compared to unsecured loans, people who choose to get a secured loan can usually get higher borrowing limits and lower interest rates.
Charging orders are a legal way to turn a loan you took out without the option to put your house up as collateral into a loan where your house is used as collateral. Putting a charging order on a house means that if there is money left over after the mortgage is paid off and the house is sold, it will be used to pay off the rest of the debt. According to Fool.co.uk, this means that you can't sell your house until you've paid off your mortgage, any second mortgage and other secured loans, as well as the amount due under the charging order.
Before a court will look at an application for a charging order, the lender must have gotten a county court judgement against the borrower and the borrower must not have paid the court-ordered payments on the judgement. Also, a charging order doesn't guarantee that the debt will be paid back, but it does stop the person who owes money from selling their property without paying back what they owe. Once the charging order is in place, the debtor is not required to sell their property. However, in extreme cases, a lender could ask a court to force a sale. When a creditor has a Charging Order Absolute, the court rarely lets them sell your home. The court will decide whether or not to issue an Order for Sale.
At the moment, about 35,000 charging orders are given out each year, but this number is slowly going up. According to the BBC, "advisors say that the practise is becoming so common that loans and credit cards should be advertised in the same way as mortgages, with warnings that your home could be at risk if you don't make payments."
Most people agree that lenders should be able to get back the money they lend, but the whole point of an unsecured loan is that it won't put the borrower's home at risk if they run into financial trouble and can't pay back the loan on time. Peter Tutton of Citizens Advice pointed out that banks also benefit from this practise because they still charge the higher interest rate for unsecured debt. "Lenders are kind of getting it both ways. They are getting the risk premium from the borrower, but they are also getting the security of the charge, and that seems unfair," he said.
Malcolm Hurlston of the Consumer Credit Counselling Service told the BBC that the Department of Trade and Industry or the Financial Services Authority should look into it if the current trend of using these orders to force unsecured loans into secured loans keeps up. The Financial Services Authority then said that they didn't have the power to help and that the Department of Trade and Industry should handle it.
Since there aren't any rules about the situation right now, the best thing to do is keep yourself from getting into a situation where you could get a charge order.
- If your financial situation gets bad, you can get free advice from experts at Citizens Advice or the Consumer Credit Counseling Service on what to do next.
- Use sites like Moneynet (http://www.moneynet.co.uk/loans/index.shtml) to compare as many loans as you can.
- Check your own finances to see if you can afford the payments now and if you think you'll be able to make all the payments in the future. Using loan calculators like (http://www.fsa.gov.uk/consumer/04 CREDIT DEBT/loan calculator.html) can help you decide if you can afford to get a loan.
- If you do get a loan and then run into money problems and can't make your payments, talk to your lender right away about the problem.
- Carefully read through all paperwork and agreements.
Useful resources:
Moneynet loan comparisons (http://www.moneynet.co.uk/loans/index.shtml)
The Financial Services Authority has a loan calculator at http://www.fsa.gov.uk/consumer/04 CREDIT DEBT/loan calculator.html.
Disclaimer:
All of the information in this article is just for general knowledge and shouldn't be taken as advice under the Financial Services Act of 1986.
Before signing any binding contracts, you should definitely talk to the right professionals and lawyers.
