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Alarm over loans that can make debtors homeless
Charities are worried that lenders are pushing more people into consolidation deals, writes Jill Insley
Sunday April 15, 2007
The Observer
Borrowers struggling with personal loans and credit card debt are being pressured to take out consolidation loans that could result in the loss of their homes.
Debt advice charities, including Citizens Advice and the Consumer Credit Counselling Service (CCCS), warn that lenders are increasingly pushing customers to extend their mortgages, or take out second loans secured against their homes to pay off existing unsecured debt, even when they know the borrower cannot afford the new repayments.
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Peter Tutton, a social policy officer specialising in credit and debt for Citizens Advice, says: 'There are problems with secured consolidation loans - we're seeing lots of evidence that where people do get into [financial] trouble, they're being pushed into consolidation.'
Citizens Advice is conducting research on credit and debt, particularly relating to the housing market, that will be published in the summer. This, says Tutton, will name and shame lenders involved in such cases. The CCCS says its advisers are seeing a rise in the number of people struggling with loans secured against their homes. Nine times out of 10, a borrower should not convert unsecured loans to secured ones, it adds.
James Ketchell, a spokesman for the CCCS, says it is easy to tempt people into such a move at the moment, as interest rates are considerably lower on secured lending than unsecured. 'It's a solution for five or six years, but then they build up more credit card debt and personal loans and they're in an even worse situation than before. That's why we say that type of loan is to be avoided in general.'
Tutton says the secured loan sometimes fails to provide any relief at all: 'We've had cases where people have entered into secured loan agreements where [the payments] were not affordable from the outset. You wonder whether it's lenders and brokers not doing their jobs properly.'
When a person with unsecured loans falls into arrears, the lender will encourage the borrower to pay at least part of the amount due each month. If that fails it may suggest that the borrower talks to a debt counselling service, such as the CCCS or Citizens Advice, about rescheduling debts, arranging a debt management plan or taking out an individual voluntary arrangement (a legal agreement to repay debt over a set period). But lenders rarely force such borrowers into bankruptcy, a course of action which would result in the loss of their home, if they own one.
However, if loans are secured against a property and the borrower falls into arrears, the lender will first take out a county court judgment (CCJ) against the borrower to get repayment. If this fails, it can then secure a charge over the property, enabling it to reclaim the value of the loan when the property is sold. In extreme cases the lender may push for possession of the property.
CCJs for non-payment of consumer debts rose by 33 per cent in 2006, compared with the previous year, reversing the long-term decline in judgments for the second year running, according to the Registry Trust. Malcolm Hurlston, founder of the CCCS and head of the Registry Trust, which records CCJs, says the likely cause is that creditors are seeking to limit their exposure to bad debts through staking their claims to available properties. 'Judgments are an important item in creditors' armoury, particularly for dealing with people who are "won't pays" rather than "can't pays", and the sharp rise indicates that it is creditor behaviour that is changing.
'Creditors are seeking judgments as the necessary first step to obtaining charging orders against debtors' properties, thus securing their share in any equity. It is a further warning to home-owners who may have borrowed too heavily on top of rising interest rates and escalating house prices.'
Danger: secured loans on offer
Betty works for the civil service but, during a period of unemployment, built up a number of unsecured debts: credit cards, bank loans and an overdraft. She recently approached the banks with a financial statement and an offer to pay back what she owed.
One credit card provider accepted her offer and agreed to freeze her interest for six months. But she then received several phone calls suggesting that, instead, she take out a loan secured against her property with the credit card provider to clear all her debts. When she refused, it grew more and more insistent, making her feel harassed.
Citizens Advice says taking on further debt is not advisable in her case, as all her current debt is unsecured, which means she is in no danger of losing her home. But a secured loan could put her home in danger if there are future problems. Having secured a freeze on interest and a new job with a fixed income, she feels she can reduce her debts over the next few months.
Sarah has an unsecured debt from a bank for £7,000 and has been paying a reduced sum of £25.62 a month, which is all she can reasonably afford. The bank to which she owes the debt has now passed it on to a collection agency, which has requested that she agrees to a voluntary charge being made on her property, even though the bank has not obtained a county court judgment (CCJ).
Citizens Advice has told the client it may not be wise to change an unsecured debt into a secured debt and the creditor cannot insist on a charge unless a CCJ has been made and defaulted on.
Citizens Advice says this is poor practice by the collection agency, which has refused an affordable offer of payment from the client.
Arnold, a married man in his sixties, owes £37,000 in three unsecured loans: two to a bank totalling £24,000 and the rest to a loan company. He has a joint income with his partner of £1,200 a month and is currently paying £1,100 a month out on his loans.
He has about £70,000 equity in his property, and when the bank worked out a personal budget with Arnold, it advised him to consolidate his unsecured debt into his mortgage - something the bank said it would arrange. Arnold felt that he could trust his bank to give him good advice, but is worried about it advising him to turn an unsecured loan into a secured loan. As he has retired, he will not be earning more money to pay off debt more quickly.
Julia, 47, is a retired police officer who is single with no dependants and has two part-time jobs so that she can keep up payments to creditors. She owes £11,876 on eight store cards, an overdraft and an unsecured loan; she is also paying off a mortgage on her home.
On the recommendation of a debt advice company, she offered reduced payments to her creditors, but did not receive a response from the provider of six of her store cards. After two months, it contacted her, rejecting her plan and pressuring her to take out a consolidation loan.
She does not want to do this, and has told the lender so on numerous occasions. She said she could not afford to take out the loan, which would be secured on her property, so the provider offered to reduce the loan's interest rate. She then received a pack in the post with a form for her to sign to take out the loan, but with no details of the repayments.
She telephoned the lender's call centre and was told that the company does not reveal the size of repayments until after an agreement is made. The pressure, if she were to give in, could ultimately lead to the loss of her home.
