Do secured loans cause debt management problems?

Many homeowners could be walking into serious debt problems by using secured loans for their debt management issues, according to some debt advice organisations. This article discusses the alternative debt help options available to homeowners and could prevent them from losing their home.

For many people struggling with their outstanding unsecured balances i.e. personal loans, credit card debts etc. they may rely on “advice” that could potentially see them homeless.

Leading debt help firms, including The Debt People, Chiltern and Hamilton Locke, along with charity Citizens Advice have warned overstretched consumers to think twice before considering a secured loan to solve their current debt management issues.

Frequently these loans are sold to over-indebted individuals who can ill-afford the repayments, plus the potential pitfalls aren't always clearly explained by the provider in advance.

Homes are at risk if they are not maintained and the consequences of failing to sustain payments to a loan secured against your property can include the repossession of your house or assets to cover the loan amount.

In many cases, an alternative debt management solution may help you to get out of debt without the risk of losing your home.

What are the alternative debt management solutions?

There are a number of alternatives to secured loans that can help to alleviate debt problems which, depending on your circumstances, could mean that repayments are simplified and reduced to a more affordable level. The most popular professional debt solutions include Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs) and Trust Deeds.

Debt Management Plans (DMPs)

A DMP provides a way for you to repay in full all of your consumer credit debts (personal loans, overdrafts, store cards, catalogues, credit card debts etc). Based on an assessment of your income and expenditure, an affordable monthly payment is calculated that you can realistically afford once your living costs have been accounted for. This gathers all of your repayments towards your unsecured balances into a single payment, and makes finances easier to manage.

Your debt help provider will distribute this payment to creditors on a pro rata basis, so the creditors who are owed the most receive the largest portion of your monthly payment. They will also negotiate with your creditors to reduce or freeze the interest and charges added to your accounts, to lower the overall amount of debt owed.

 

Individual Voluntary Arrangements (IVAs)

IVAs were introduced as an alternative to bankruptcy in England and Wales under the Insolvency Act 1986.

An IVA involves a legally binding agreement between you and your creditors, which is drafted by a qualified insolvency practitioner. This protects you from creditors changing their payment demands or from altering the terms of the agreement. The insolvency practitioner offers initial debt and IVA advice along with providing support throughout the IVA term.

With an IVA, a set amount is repaid over a fixed period of time - usually within five years. After this time, all remaining outstanding unsecured balances are written off. Also, all additional interest and charges stop being added to your accounts.

Trust Deeds

Trust Deeds are essentially the same as an Individual Voluntary Arrangement but for people living in Scotland. Like an IVA, they combine payments to multiple unsecured balances into a single monthly payment. This is also repaid over a fixed period of time – but with a Trust Deed this is usually within three years.