Problems with Secured Debt Consolidation Loans
Are Homeowner Loans Always a Good Way to Reduce Monthly Repayments?
Feb 7, 2009
Secured debt consolidation loans have grown in popularity. They are a means of putting all unsecured personal debt under one roof, including high APR personal loans, credit card debt and personal overdrafts. However, these are all forms of unsecured debt. Is it a sensible idea to turn unsecured debt into secured debt?
Secured Debt Consolidation Loans vs. Unsecured Debt
Secured debt consolidation loans, also known as homeowner loans, allow a borrower to combine debts into a single monthly payment, benefit from a low APR and reduce monthly repayments. This can be the difference between paying household bills punctually and the worry of money problems. Further unsecured loans may not be available to a borrower because of a bad credit history.
Whilst a secured debt consolidation loan has merits, turning unsecured debt into secured debt is rarely a smart move. It gives creditors far greater powers in the event of loan default as they now have collateral. This means that, should a borrower fail to make their monthly repayments, it could lead to creditor harassment or even house repossession in certain circumstances.
Doesn't a Charging Order Turn Unsecured Debt into Secured Debt?
It is true that a lender can get a charging order and turn unsecured debt into secured debt. However, the process of getting a charging order is very involved and means that a lender has to register a County Court Judgement or CCJ against a borrower before this can even be contemplated. Should a borrower come up with a repayment plan, a charging order could be prevented by a judge.
Consider a Debt Solution before Getting a Secured Debt Consolidation Loan
Unless someone has a job that depends upon good credit, it is worthwhile considering a debt solution, such as a debt management plan, when experiencing money problems. Getting a secured debt consolidation loan could serve to worsen money problems, especially if the borrower fails to close down sources of credit that had been consolidated by a homeowner loan.
A debt solution will result in a bad credit rating, but many borrowers already have adverse credit which is why they have turned to a secured debt consolidation loan. A debt solution could simplify finances greatly and even result in a debt write-off in the case of an Individual Voluntary Arrangement.
Whilst secured debt consolidation loans allow a borrower to get a low APR, the negatives outweigh the positives. Should an unsecured loan no longer be available because of a bad credit rating, someone experiencing money problems would be well advised to see if a debt solution presents a more favourable alternative.
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