Friday, September 21, 2007
Habitual viewers of daytime television will have seen Carol Vorderman in adverts, cashing in on her mathematical prowess on Channel 4's Countdown to promote secured loans. Her sales pitch for Firstplus, a division of Barclays, has prompted several protests by campaign groups.
The reason why she gets such criticism is that secured loans are often taken out by people in financial distress. Managing your Debt, a new book published by which? warns that demand for secured loans is growing rapidly as homeowners search for solutions to their debt problems. The Consumer Credit Counselling Service (CCCS), a debt advice charity, has seen a sharp rise in the last year in the number of homeowners getting into problems after signing up for a secured loan.
Those claims are supported by research from Moneysupermarket.com, which found that nearly 13 million people have taken out loans to consolidate their existing debts, of whom more than eight million go on to build up further debts and more than five million believe they will always be in debt.
Some of the best-known lenders include Firstplus; Ocean Finance, a division of the American Insurance Group; and the privately owned Norton Finance. Consolidation loans offer the most fertile ground for such specialist loan companies. People often approach them because their credit cards are at their limit and they've been turned down for an unsecured loan. Their mortgage lender has probably also turned them away, possibly because they are struggling to make existing payments.
Which? formerly known as the Consumers' Association, has long argued that only a tiny minority of people should consider secured loans. The CCCS says they are an appropriate solution for about 3 per cent of over-indebted people, 'but the adverts imply they are appropriate for the majority'.
Problems arise because many people believe they are consolidating debts in a personal (unsecured) loan, when they are in fact using a loan secured against their home. If you default on the loan, your lender goes through the Land Registry to place a legal charge on your home. In the pecking order of creditors, the lender of a secured loan takes second place to a mortgage lender, so if the home is repossessed and sold, the secured loan company would get its money back only when the mortgage had finally been paid off.
Many 'consolidation loans' are advertised in a confusing way. Even when the adverts prominently tell consumers they could lose their homes if they default on repayments, studies have shown that people still believe that the only loan secured against their home is their mortgage.
Debt advisers say many of the people who fall behind with repayments on a secured debt consolidation loan just didn't realize that their home was in jeopardy.
Check the small print
· Don't borrow more than you need - you will only spend it. And the result? You will pay more back in interest.
· Can you afford the repayments? Make sure they won't make you overdrawn on your bank account.
· Check the interest rate. Lenders are obliged to offer two-thirds of customers the advertised rate, but the rate you are offered may be higher depending on your credit score.
· Look at the small print for penalty charges. Some banks have strict regulations on when and how to pay.
· Always reject payment protection insurance if it is offered - for most people, it is inappropriate.
· 'Managing Your Debt', a Which? Essential guide, can be ordered on 01903 828557 (£10.99, p&p free) or at www.which.co.UK/books, or is available from bookshops.
Source: http://money.guardian.co.UK/creditanddebt/debt/story/0,,2170923,00.html |
