FEATURE: A guide to loan protection
With hard hit Brits continuing to turn to personal loans, how are they protected when securing such finance? Barney McCarthy takes a look
When money is tight and your overdraft facility or credit card aren’t suitable, you may turn to a personal loan to tide you over, or to fund a particular project. There are two main types of loan available to you: secured or unsecured. The first type is borrowed against your property, meaning the lender has the collateral of your house if you fail to make repayments. As these loans represent less of a risk to the lender, you are likely to be able to borrow more and at a more competitive rate than unsecured loans, which are not backed up by any assets, such as a property. Don’t think that this necessarily makes secured loans a more attractive option though. After all, you could lose your home if you don’t keep up with your repayments.
It is important to bear in mind that loan providers are not immune from the current credit crunch. In the same way that mortgage lenders have axed larger homeloans and tightened their criteria, the impact has been felt in the unsecured loans sector too.
Sean Gardner, spokesperson for MoneyExpert, says that over 180,000 people consolidate their debts every month and the vast majority turn towards unsecured loans. So how will such borrowers be affected by the current lending situation? “Lenders are wary of customers’ ability to repay what they owe so are becoming increasingly strict when it comes to choosing who they lend money to,” Gardiner explains. “There are still competitive rates out there, particularly for people with good credit records. Those in muddier waters can still borrow but may have to pay more than they would have even four months ago.”
Unless you keep abreast of changes in financial regulation, you may be unaware that the legislation around loans has been gradually changing over the last couple of years, with the latest developments launched in April 2008. Although it may be unlikely that you will need to borrow more than £25,000, this was the previous threshold under which all unsecured loans were covered by the Consumer Credit Act (CCA).
As of 1 April 2008, this limit was removed, meaning that all new credit agreements (secured and unsecured), regardless of value, are now covered by the Act. There are certain exemptions within this for high net worth individuals and agreements for business purposes. In October 2008 the scope of the CCA’s licensing regime for personal loan providers will be extended to include both those who provide debt administration and credit information services, such as Experian and Equifax.
John Hutton, secretary of state for business and enterprise, says: “The revised remit means there will be more protection for people who get caught out by rogue lenders who pretend to play by the rules but act like loan sharks. Enforcers now have the powers they need to crack down on the small minority of trader who treat customers unfairly. Pressure sales techniques, unfair terms and conditions, extortionate interest rates or aggressive debt collection practices will not be tolerated.”
In terms of securing loans against your property, Andy Moody, managing director of secured loan company Loanoptions, says consumers may be better protected than before and that loans may be better value than remortgaging under the extended jurisdiction. He says: “The new changes mean that all secured loans for residential purposes of any size of any size come under the CCA and therefore every loan has a cooling-off period, so the client is not pressured and early repayment charges are a maximum of two months interest depending on what point in the current month the borrower notifies the lender.”
The CCA is chiefly concerned with protecting the client from being unduly influenced to take out a loan and swings things more heavily in their favour. It offers more protection in that the consumer can not be charged an upfront fee when taking out a loan other than a £5 administration fee and advisers will not be allowed to charge consumers for any valuation on their property in case it influences their judgement in taking out a loan.
Making a complaint
In April 2007 the Government sought to establish an alternative dispute resolution service for consumer credit complaints under the CCA. The part of this scheme that relates to debt administration, the provision of credit information services and credit reference agencies will not come into effect until October 2008, however.
As well as the changes to the CCA, there are further schemes and codes that have been implemented with protecting the consumer in mind. If you wish to make a complaint regarding a loan you should contact the provider in the first instance. If you feel you have not received a satisfactory result from your lender, you can make a complaint to the Financial Ombudsman Service free of charge.
The Financial Services Authority’s Treating Customers Fairly initiative was also implemented by the regulator to ensure that all financial services firms are doing right by their customers, whether they are providing a secured or unsecured loan, insurance or even a mortgage. The revised Banking and Business Code released at the end of March this year also contained an enhanced promise by banks and building societies to treat customers fairly. Although the code covers banking in general, unsecured loans are referred to, requiring more detailed information to be provided to the consumer upfront.
Angela Knight, chief executive of the British Bankers’ Association, says: “The new code gives strong commitments that banks will lend responsibly and will help customers who may be heading towards financial difficulties.” The Banking Code Standards Board website has full details online of how to register a complaint against a bank or building society should you encounter problems with your unsecured loan.
If you do need to take out a loan, you will never have been as protected as you are now, but make sure you still do your homework to find a deal that suits you – not just a competitive rate – before you take the plunge.