TIMES are getting harder for hundreds of thousands of homeowners. Personal loans, formerly cheap and easy to obtain, have started to dry up or are suddenly much more expensive. Credit card applications are being rejected. Credit is generally tougher
to find.
At times like this, the potential attractions of a loan secured against the property you own become that much greater. Such loans appear to offer significantly better rates of interest than alternative forms of credit, and lower monthly payments if the loan is linked to a standard mortgage repayment period.
But second charge loans – so called because they are the second debt in line to be repaid if a property is sold – also create financial traps for the unwary. Experts warn that they can significantly worsen borrowers' difficulties and even cost them their homes.
Meanwhile, the debt crisis is getting worse. A spokeswoman at the National Debtline, a charity which offers advice to people with credit problems, says: "We have seen a 20% increase in the number of people who have been calling our helpline. The debts they need help with include mortgages and also loans secured against their properties."
Until 12 months ago, with many providers willing to offer personal loans with rates as low as 6.5%, unsecured loans were seen as also-ran products.
Yet the secured or second charge loan market is already massive, worth between £5bn and £6bn a year, with more than £35bn outstanding in loans. In the current credit crunch, where people are unable to access credit in other ways, some predictions see it rising to £10bn a year in the next five years.
Many of those who take out second charge loans are borrowers who may already be facing credit problems. Research from the price comparison website Moneysupermarket.com 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.
The issue for borrowers seeking help from the National Debtline is that a second charge loan is only one part of the total equation, explains a spokeswoman: "There are cases where people have been on various fixed rate deals for the past couple of years. At the same time, they have also been running up other unsecured debt.
"So (they] take out a secured loan, running in parallel with their mortgage. What then happens is that the original home loan deal runs out and they find that they are now having to pay a much higher mortgage rate which they cannot afford."
The issue becomes critical because, unlike their previous unsecured credit or even their card debts, they now have a loan secured against their home. If they default on the secured loan, the lender can have a legal charge placed on the borrower's 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 when the mortgage had finally been paid off. That in turn makes many secured loan providers much less flexible in cases where a borrower is unable to meet regular monthly payments.
This is a problem recognised by Yvonne Gallacher, chief executive at Money Advice Scotland. She says some of the main culprits are so-called sub-prime lenders, who specialise in offering loans to people who otherwise would find it difficult to obtain credit from mainstream providers.
"We are seeing different patterns from some of the lenders, with some less willing to negotiate," Gallacher says. "There is a banking code of practice, but the problem (comes] when you have people who are not subscribers to the code and are effectively not joined to any organisation."
This absence of effective regulation alarms consumer groups. A report by Citizens' Advice in December last year argued that the Office of Fair Trading, which regulates second charge loans under the Consumer Credit Act (CCA), does not operate well.
"Regulation of second charge lending by the Office of Fair Trading has not been updated to take account of changes in the marketplace. The OFT also does not have a clear and proactive compliance strategy," the report claimed.
Changes to the CCA in the past 12 months mean that borrowers can take complaints about second charge loans to the Financial Ombudsman Service (FOS). However, consumer credit complaints that can be referred to the FOS apply only to events taking place after April 6, 2007.
This means if you took out a secured personal loan before that date and feel you were unfairly treated, the broker or lender may well get away with it. A spokeswoman at the FOS says: "We have not really seen a flood of complaints about second charge loans so far, mainly because they are not retrospective, so it is a bit early to say what is likely to happen."
That said, the FOS can look at earlier events in order to determine a complaint about something that happened after April 6, 2007. So if your complaint refers to the way your loan has been handled after that date, it can be heard by the FOS even if it was taken out before then.
There is no formal requirement under the CCA for brokers or lenders to have professional indemnity insurance. Although some brokers may already have cover as part of their other activities in the financial sector, their cover is unlikely to extend to second charge loans.
This means that while a big lender may be able to afford to pay out in the event of a successful consumer complaint, it is less likely to be the case for brokers.
If you need to complain, make sure you do it properly
• First make it to the firm you have a problem with, either the lender or the broker.
• That firm then has five working days in which to acknowledge your complaint.
• Within four weeks, the firm must issue either a "final response letter" or a "holding response letter". The latter must explain why it has been unable to resolve the complaint so far, and indicate when it will make further contact with you.
• The final response letter, which must be issued within eight weeks, must confirm whether the firm is upholding the complaint, and, if so, what form of redress it is offering.
• If you are dissatisfied with the firm's final response you can refer your complaint to the Financial Ombudsman within six months.
• Once a complaint form is received by the ombudsman, it will first try to resolve the matter by mediating between the firm and the customer. In more complex cases, a formal adjudication may be made.
• If you do not agree with the findings, you can contact the adjudicator and, if still unsatisfied, ask for a review and final decision by an ombudsman. You can still take court action against the business concerned.
• Finally, if you are tempted to take out a secured personal loan, research all the options first. That includes other forms of credit that do not place your home at risk. It is always better not to have to complain at all than to do so because something has gone wrong.
Borrowing tips• Don't borrow more than you need: you will only spend it and have more interest to pay.
• Can you afford the repayments? Make sure they won't make you overdrawn.
• 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 lenders have strict rules for making payments.
• Always reject payment protection insurance if it is offered. For most people it is inappropriate.
