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| BankruptcyNews |
Posted - 09 July 2007 : 10:06:27
More people have loans that risk homes
Rising interest rates and large credit card liabilities are driving increasing numbers of consumers to take out controversial loans that put their homes at risk, experts warn.
Five interest rates rises over the past 11 months will leave scores of people unable to meet monthly repayments on credit cards, personal loans and car finance deals, insolvency experts predict.
Consumer groups fear that the debt crisis is driving people into the hands of highly controversial debt consolidation companies.
The trend is seeing a surge in so-called second-charge mortgages which, it is claimed, will lead to rising repossessions for decades to come. "There is increasing use of loans secured on their homes to repay unsecured debt," said Steve Treharne, head of personal insolvency at KPMG, the financial services group.
"At first, people think it's good, because they pay a lower interest rate and their monthly repayments fall. But by doing so they are putting their house at risk and it often marks the moment when they are getting themselves into serious trouble." Mr Treharne said as many as one in 10 cases of bankruptcy and insolvency involves debt-consolidation loans.
These products, the most common type of "second charge mortgage", are heavily advertised on day-time TV.
Debt consolidation companies offer to pay off a consumer's credit card bills, store cards and other types of unsecured lending. The consumer then pays the company back through a loan. These arrangements often seem attractive because they have to deal with just one creditor and the monthly payments are normally lower, as the loan is stretched over a longer period. But the overall cost of repaying the debt can double as a result.
The biggest players in this burgeoning debt consolidation market are Ocean Finance and Firstplus, a firm promoted by the presenter Carol Vorderman, who has described the company as "excellent".
According to the Bank of England, consumers have racked up more than £1.3 trillion of unsecured lending.
The bank's Monetary Policy Committee last week voted to raise base rates to 5.75 per cent - the fifth 0.25 per cent increase since July last year.
City economists expect rates will rise to 6 per cent. Even though it takes between six months and two years for the full effect of a rise to be felt, repossessions have already increased sharply. Three times as many properties were repossessed in the second half of last year than in the first half of 2004.
According to the Consumer Credit Counselling Service charity, debt consolidation loans only benefit a minority. In an analysis of thousands of people who had taken out these loans, it said 97 per cent would have been better off by taking alternative action.
Mr Treharne said: "Debt consolidation loans inherently aren't a bad thing. The problem is that people see their monthly repayments are lower and then go out and spend the difference. They don't understand the long-term picture or the trouble they've got themselves into."
Rachel Hauxwell, 33, lives with her husband and three children in Worksop, Notts. The couple took out a £16,000 loan plus an extra £4,000 loan insurance policy with Firstplus in September 2005 to pay back over 10 years.
Their initial monthly payments were £220, which had risen to £259 last month before the most recent rate rise. "At the time, we thought it would be the answer to all our prayers and would help get us back on our feet. Now we have run all our credit cards back up and I feel as if we are not getting anywhere.
"I worry about losing our house and don't know how we will cope when the new interest rates take effect on our monthly payments. If I had a second chance I would never do it again and I tell people to not even think about it."
Source: telegraph.co.uk
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