Borrowing money is simple before a loan default and bad credit become an issue. Once someone has bad credit, high APR unsecured loans are no longer an attractive option. This makes it very expensive to borrow money when consolidating debt. Multiple unsecured debts, such as credit card debt, personal overdrafts and payday loans online can make family finances difficult to manage.
Why Do Borrowers Turn to Secured Loans?
A desire to simplify family finances drives those seeking to consolidate debt to turn to secured loans. These are also known as homeowner loans or a second charge. This involves using the family home as collateral in order to borrow money at a lower rate of APR. Others take out a secured loan because they wish to borrow more than would otherwise be possible with an unsecured loan.
Home Owner Loans, Loan Default and Property Repossession
Whilst it is possible for a lender to be granted a second charge on a property via a charging order, it remains unlikely. The court procedures for arranging a charging order are long-winded and very involved. Many of those that have defaulted on an unsecured loan will have pursued a debt solution long before this ever has a chance to happen.
Homeowner loans mean that someone can borrow more because the lender has collateral. This collateral is the primary reason to avoid getting a second charge on the family home. Loan default cannot be handled with a debt solution meaning that property repossession is the likely outcome.
Secured Loans and Creditor Harassment
Secured loans provide a creditor with more options when recovering debt. Whilst there is no evidence to say that creditor harassment is any greater with secured loans relative to unsecured loans, it is considerably more difficult to avoid creditor harassment when a home owner as the borrower is a sitting duck.
A number of tenants move home to avoid their debts. Once a period of 6 years has elapsed, bad credit entries do not show on a credit report. The Limitation Act also means that creditors cannot legally pursue someone with regard to unsecured debts meaning that the debt is written-off.
Negative Equity and Homeowner Loans
When selling a home, handing back the keys doesn’t mean that any secured loans on the property in excess of the selling price are written off. Unlike with unsecured loans, a lender can pursue a debtor for up to 12 years for any secured debts as a result of negative equity.
Whilst secured loans do allow someone to borrow more at a lower rate of APR, think carefully before taking out a homeowner loan. Is it really worth consolidating debt on credit cards and turning it into a secured debt? If at all possible, opt for an unsecured loan as it provides the borrower with more options in the event of financial difficulties.