Secured Loan: Unable to pay

There is a process that creditors follow in order to collect an unpaid secured loans agreements:

• They call you and send letters requesting the outstanding payments.
• The creditor may pass the debt to their own collections department who will also contact you and request payment of the arrears
• If you miss a number of payments (between three and six), the creditor may send a default notice. If you cannot pay, the secured loan agreement is then cancelled
• The creditor may then request the services of a debt collection agency to collect the arrears on their behalf
• The debt collection agency will send letters and phone calls to persuade you to pay a specified amount each month
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  If a creditor is not willing to accept your offer of payment or you cannot pay at all, they may start court action to recover the debt. If this happens you will receive a claim pack from the court. The following documents will be included:
  • A claim form telling you how much you owe, who is applying for the judgment and where to return your paperwork
  • An acknowledgment of service form for you to apply for more time to complete your paperwork
  • An admission form for you to show the court how much you can afford to pay
  • A defence form for you to complaint if you think the amount claimed is incorrect

If you do not send the complete documentation back before the deadline, the court sets the payment at the amount the creditor has requested. After the deadline, the court sends a letter to tell you how much to pay and when. This letter is called a 'Judgment for Claimant'. A county court judgment (CCJ) is registered when you receive a letter titled 'Judgment for Claimant' and will be recorded on your credit file.
This will specify a monthly instalment or ask you to pay the full amount immediately or 'forthwith'. If you make the payments, no further action should be taken. If you do not make the correct payments on time, the creditor can ask the court to enforce payment using one of the following methods:

• A warrant of execution, which means a visit from the bailiffs
• An attachment of earnings order
• A charging order. It is an order from the court that allows the creditors to place a charge on your property.
• An examination of means. Here the court asks you to attend a hearing to give evidence of your financial situation.
• A third party debt order. Here, the court takes money directly from your bank account.
• In some cases, they could enforce the debt through the high court

How To Find Reputable Secured Loan Companies?

Secured Loans lending is considered a high-risk credit activity as borrowers risk the repossession of their properties if they fault in their payments. Potential borrowers should therefore make sure that secured loan lenders hold the appropriated Consumer Credit Act 1974 license issued by the Office of Fair Trading (OFT) and that the secured loan lenders comply with OFT's latest standard for second charge lending for lenders and brokers.

Licensed Secured Loan Lenders

Customers can check online whether secured loan lenders hold a license or not by searching on OFT's Consumer Credit Act (CCA) Public Register at http://www2.crw.gov.uk/pr/Default.aspx. The register allows searches based on license number, company registration number, and organisation or trading name etc.

Second Charge Lending Standards

The OFT has published a guidance on second charge lending or secured loans where certain consumer credit standards are expected from lenders. Potential borrowers should ensure that the business they are seeking to borrow money from do comply with the recommendations and fair trading practice highlighted in the guidance. The standard covers issues such as:

• Advertising. Secured Loan Lenders should not suggest that loans are available regardless of the income or financial circumstances of the borrower or that they will depend only on the borrower's property value.
  
  
• Understanding of risk and obligations. Secured Loan lenders should highlight the risks to the borrowers if they miss payments, including arrears charges, repossession of the property and borrower's credit record in the future. Risk and obligations need be explained in a clear, plain language and lenders must ensure that borrowers understand all the implications before proceeding with contractual agreements.
  
  
• Transparency about rates and fees. Secured Loan lenders need to clearly state in which circumstances rates or charges may change, any commissions that brokers may take, default charges and what early repayment charges may apply if any.
  
  
• No high pressure selling. Borrowers should be given enough time to understand the conditions of the agreement according to the CCA, with no pressure or incentives for a quick agreement.
  
  
• Clear Contract. The contract should clearly explain the nature of the agreement as well fees, charges and any conditions that may apply as result of default payments.
  
  
• Pro-active Plan for customers in arrears. Secured Loan Lenders should offer a pro-active plan for customer in arrears, engaging them to address the problem and notify them on regular but not excessive periods as stated in the CCA.
  
  
• Options before repossession. Reposition should be the last option that a secured loan lender should opt. Threats of court proceedings, unreasonable demands of one large arrear payments or in short time should not be used.
  
  

Regulation on Secured Loans

The size of the secured loans or homeowners' loans market is estimated to be approximately £3bn with an average loan of £20,000 however secured loans are not regulated by the Financial Services Authority (FSA). The FSA only regulates first mortgages on the properties.

Secured Loans are regulated by the Consumer Credit Act 1976 which requires businesses providing secured loans to be licensed by the Office of Fair Trading (OFT). Due to the increasing number of repossessions in the last years, the OFT has also published a guidance on standards expected from secured loans lenders and brokers. The main purpose of this guidance is to ensure that lenders delay repossessions for borrowers having problems making payments.

If standards are breached, the OFT can revoke businesses' lending licenses and further regulatory actions can be enforced.

The Office of Fair Trading can also investigate secured loan businesses with evidences of malpractice.

Since 2008, Secured Loan lenders have also to comply with Pre-action Protocol for Repossession Claims Based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property. This protocol deals with cases going to court for repossession and try to encourage alternative solution to repossession.

The Office of Fair Trading is currently working on a new guide for creditors on Irresponsible Lending Practices.

Non-Secured Loans

There are several types of non-secured loans as described below :
Personal Loans. Personal loans are also known as unsecured loans and they are the most common way to borrow money.
Unsecured loans are not backed by any collateral, i.e. something of worth such as your home which can be repossessed if the loan isn't repaid. Personal Loans are granted based on the borrower's credit rating and therefore considered cheaper and less risky to the borrowers than secured loans.
Student Loans. Student loans are designed to help students with their tuition fees and living costs in higher education. Students start to pay these non-secured loans when the course finishes and when their annual income reaches a certain limit. These are low interest rate loans.
Doorstep Loans. Doorstep loans are loans where the creditor offers cash and collects payments at your home. They are usually small loans and paid pack over short periods of time. Borrowers may pay more for this type of loan because the interest is higher than high street loans.
PayDay Loans. PayDay loans are also known as cash advance loans. The lender offers the money and the borrower writes a cheque out to the lender for the borrowed amount plus interest. The creditor cashes the cheque within an agreed short term. These loans can be very expensive because the high interest rate.
Credit union loans. Credit union loans are offered by financial co-operatives owned by their members. They grant low-rate loans and most of the cases take payments directly from the borrower's wages.
Loans from family or friends. Money can be either borrowed from family and friends as an informal agreement where you agrees verbally to pay back the borrowed amount, or a family member takes out a loan and gives you the money which you will pay back, or a family member or a friend guarantees a loan for you.
Loans from employers. These are advances on your wages offered by your employer and taken back directly from the employee's wages.
LoanSharks. These are loans offered by unlicensed companies which recur to violence or intimidation to recover their money if the debt is not paid back. These loans generally have extremely high interest rates.
Pawnbrokers. A pawnbroker lends money that is the value of the good is being pawned. If you want to keep the good you need to pay the loan back within a period of time. If the loan is not paid back, the pawnbroker can resell the good.

What Are Secured Loans?

Secured Loans are loans where the lender agrees to give money to the borrower and uses the borrower's home as collateral in most cases. Secured loans however are not 'secured' to the borrower but to the lender who can repossess the borrower's home if the loan repayments are not met.

An increase of the number of borrowers trying to pay off their debts in recent months has made secured loans even a more popular choice.

The purpose of this blog is to provide information about this type of loans so that borrowers can make an informed choice.