The hidden cost of unsecured loans

Simon Gompertz
Working Lunch

Your cards can cause trouble

Working Lunch viewer Christine Hall put her finger on something when she wrote to ask about "a legal loophole" which might put your home on the line.

It seems as though lenders are rushing to the courts to win the right to cash in on the value of a customer's property, if the customer gets into arrears.

The weapon banks and credit companies are using is called a charging order. The number of these orders granted by county courts rose by 44% last year to over 97,000.

It's all to do with whether loans are "secured" or "unsecured".

What's the difference?

If you were to lend �10 to a friend and he doesn't pay it back, there is not much you can do. The loan is unsecured.

But if he promised you his mobile phone or his goldfish if he failed to come up with the money by an agreed time, you have some security. The loan is secured against the phone, or the fish.

Of course, the best security is thought to be property and that's where the charging order comes in.

If you owe money, you might end up on the wrong side of a county court judgement. If you still fail to pay up, the creditor can ask the court for a charging order, which lays down that the money will be paid from the proceeds of the sale of your home.

Suddenly what might have been a credit card debt or a personal loan looks more like a mortgage - except that any real mortgage you have has to be paid off first.

The unsecured loan has become secured.

It's vital to understand that a charging order does not, of itself, result in the forced sale of your home. But armed with the order, a creditor can ask a judge to to grant an "order for sale" to get hold of the money you owe.

At each stage, there has to be a hearing. And the borrower can deploy a number of arguments to thwart the lender's tactics.

It could be that you are ill or there are family problems or you partner has nothing to do with the debt (but does own half of the home).

Another factor might be negative equity: if your home is worth less than your mortgage, a judge might say that it would be pointless to add an extra charge to the property.

It is hard to tell whether there is a surge in orders for sale, to match the rise in charging orders. The Court Service could not provide me with the relevant figures.

Major lenders deny that they have a secret agenda to get their hands on borrowers' homes. They tend to use a charging order as a frightener, without intending to move to an order for sale.

However, debt advisers are worried about a new twist in the law which will make it easier for creditors to obtain charging orders. Some predict that the number of orders will soar even higher.

Charging orders set to increase

This is why. At the moment a debtor subject to a county court judgement will be told either to pay the money back all at once or, more likely, to pay by a series of instalments.

The creditor can only ask for a charging order, if the borrower defaults on the new arrangement. The whole thing could take months.

But new legislation is in place which allows creditors to ask for a charging order as soon as they have won a judgement. From the point of view of the credit card company or lender, the whole process will be smoother and quicker.

A spokeswoman from the Ministry of Justice told me that no decision had been taken on when the new rules would be implemented.

Charging orders aren't exactly a loophole. They are legal, well established and being used more more frequently. So watch out!