Uk Debt Increases: But It's Nothing To Do With A Mortgage
Monday, November 13, 2006
Debt charities have reported they are hearing from an
increasing number of people whose spending is out of control.
On average, people who turn to the Consumer Credit Counselling
Service for advice owe £31,000 which does not include their
mortgage.
The rising trend means more Britons will need to reduce
interest and actively manage debts. The large sums involved
also mean that more will find themselves in the dangerous
territory of unregulated loans.
But in their desperation, consumers attempting to take control
of their debts are being warned to beware of unregulated loans
that can lock them in for years and leave them at the mercy of
rocketing exit charges.
As the name suggests, these loans fall outside the normal
safeguards we have come to expect when borrowing money. They
are typically loans made to individuals, outside any mortgage
arrangements, for amounts above £25,000.
Personal loans for amounts below £25,000 are subject to the
Consumer Credit Act. This ensures lenders cannot impose
excessive fees or conditions on their customers.
These protections are particularly valuable when borrowers want
to pay off their debts early. In these circumstances the Act
says lenders cannot charge a fee of more than one month's
interest. Better still, if the term of the loan is one year or
less, lenders cannot charge and early repayment penalty.
Mortgages, usually for more than £25,000, have their own
protection provided by the Financial Services Authority. Its
rules mean that when borrowers repay a mortgage early or fall
into debt, charges are limited to the costs the lender will
incur.
None of these safeguards are enjoyed by borrowers who take out
unregulated loans. Unregulated lenders include complicated and
costly repayment penalties in the small print of their
contracts. Arbitrary charges for early repayments are common
and penalties can lock borrowers in for years, during which
time they are also at the mercy of rising interest rates.
So do secured loans make sense? While secured loans can make
financial sense in certain circumstances, as borrower, you
should carefully assess the terms and conditions attached to
the loan.
You also must be certain that you can repay the loan. The
lender enjoys the security aspect of the loan, not the
borrower. If you cannot handle the repayment, the lender can
forcibly sell your house to recover the loan.
This is why many consider the secured loan as a last resort and
that the only justifiable reason for such a borrowing option is
a need to reduce or consolidate existing debt costs.
The two leading reasons for taking out a secured loan are
unsecured debt consolidation and financing home improvements.
Other popular reasons for secured borrowing are mainly buying a
new car, paying for a wedding and buying property abroad.
Given the UK public's current appetite for borrowing, the
secured loans industry is unlikely to go into recession.
Datamonitor research expects such loan advances to reach £51
billion by 2008.
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posted by Dennis Cheesman @ 5:52 AM,
