Essentials of Borrowing

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Incautious Borrowing

The level of personal debt in the UK is spiralling, with reports of an average of £31,000 owed by people contacting the Consumer Credit Counselling Service for help, and this figure excludes mortgages. We have all seen television and magazine advertisements for debt consolidation providers, who claim that if you are struggling with your debts they can provide an ‘easy solution’. They claim that they can roll all your debts up into one simple monthly payment, so effectively that the implication is that you may even be left with spare cash every month. That is as maybe, but they are providing a service which carries a particular appeal for people whose debt situation has got out of control and who are desperate to find an answer. The big problem is that the sums involved are very large and the loans industry concerned is not controlled by the Financial Services Authority. Typically the loans involved are well above the £25,000 per individual which is the ceiling for cover by the Consumer Credit Act.

This would have provided protection against unacceptable conditions being applied or excessive costs being charged to the borrower, especially important if early repayment of the loan is likely as the lender is limited to a charge of just one month’s interest As mortgage payments are not involved, the protection which would be provided by the Financial Services Authority is not available. This would have limited the lender to charging costs only in the event of early repayment or debt problems. The result of this is that borrowers who are desperate to resolve their situation are liable to enter the territory of unregulated loans, where they can find that they are offered very long term loans (with of course long term costs and very likely rising interest rates) and early repayment charges which are so high as to deny them the possibility of an early exit. Many people sign up to agreements without reading the small print; anyone in the position of trying to resolve pressing debt problems is more likely to do so, and therefore more likely to accept repayment terms which under normal circumstances they would not consider. Whether to opt for a secured loan is a difficult question to answer.

The terms being offered need to be examined with great care, to find how closely they match your needs and payment abilities. Let there be no doubts about it. If your home is the security for your loan and you find that you have difficulties in repaying the loan on the agreed terms, then the house may have to be sold to meet your commitments. It has happened to many home owners. Of course, after the sale of the house you should have funds left for another house purchase or, at the worst, to enable you to rent. You can of course talk to your lender to find out if any compromise is available which would enable you to keep your home, but unless the sum involved is very small such an outcome is somewhat unlikely. So then you will need to look at the alternatives. Whichever option is available to you, the effects can be traumatic. You have in effect gambled a large portion of the value of your property against your ability to repay your loan, and you have lost the gamble. Downsizing will be fairly inevitable and a move from your present area may be unavoidable, and bear in mind that a move to a different area may adversely affect your ability to continue with your present employment.

If this paints a rather black picture, at least the dangers are out in the open and identifiable. The story this tells is that a secured loan is no easy option, and maybe it would be advisable to avoid this type of loan if it is possible. Despite this, many borrowers obviously feel secure in their ability to pay their premiums when due, as research by Datamonitor quotes 2008 as the year when loan advances will exceed £50 billion.


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Essentials of Borrowing