Uk Debt Increases: But It's Nothing To Do With A Mortgage

Debt charities have reported they are hearing from an increasing number of
people whose spending is out of control.

On average, people who turn to the Consumer Credit Counselling Service for
advice owe £31,000 which does not include their mortgage.

The rising trend means more Britons will need to reduce interest and
actively manage debts. The large sums involved also mean that more will find
themselves in the dangerous territory of unregulated loans.

But in their desperation, consumers attempting to take control of their
debts are being warned to beware of unregulated loans that can lock them in
for years and leave them at the mercy of rocketing exit charges.

As the name suggests, these loans fall outside the normal safeguards we have
come to expect when borrowing money. They are typically loans made to
individuals, outside any mortgage arrangements, for amounts above £25,000.

Personal loans for amounts below £25,000 are subject to the Consumer Credit
Act. This ensures lenders cannot impose excessive fees or conditions on
their customers.

These protections are particularly valuable when borrowers want to pay off
their debts early. In these circumstances the Act says lenders cannot charge
a fee of more than one month's interest. Better still, if the term of the
loan is one year or less, lenders cannot charge and early repayment penalty.

Mortgages, usually for more than £25,000, have their own protection provided
by the Financial Services Authority. Its rules mean that when borrowers
repay a mortgage early or fall into debt, charges are limited to the costs
the lender will incur.

None of these safeguards are enjoyed by borrowers who take out unregulated
loans. Unregulated lenders include complicated and costly repayment
penalties in the small print of their contracts. Arbitrary charges for early
repayments are common and penalties can lock borrowers in for years, during
which time they are also at the mercy of rising interest rates.

So do secured loans make sense? While secured loans can make financial sense
in certain circumstances, as borrower, you should carefully assess the terms
and conditions attached to the loan.

You also must be certain that you can repay the loan. The lender enjoys the
security aspect of the loan, not the borrower. If you cannot handle the
repayment, the lender can forcibly sell your house to recover the loan.

This is why many consider the secured loan as a last resort and that the
only justifiable reason for such a borrowing option is a need to reduce or
consolidate existing debt costs.

The two leading reasons for taking out a secured loan are unsecured debt
consolidation and financing home improvements.

Other popular reasons for secured borrowing are mainly buying a new car,
paying for a wedding and buying property abroad.

Given the UK public's current appetite for borrowing, the secured loans
industry is unlikely to go into recession.
Datamonitor research expects such loan advances to reach £51 billion by
2008.

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