Introduction to Loans and Charging Orders

Going into arrears means that occasionally we may need to borrow funds. When a consumer borrows funds from a financial institution, such as a bank or building society, this is termed an 'unsecured loan' as the loan is not secured to the value of the borrower’s home.

When money is lent as part of a 'secured loan' the lender has the power, in the event of default or inability to make the required repayments, to get back the cost of the loan by forcing the sale of the house. These loans are regarded to be riskier and unsecured loans are preferable.

It should be taken into account that it is possible for the lender to want a charging order against the house as collateral for their loan. This is a lengthy process for the lender and unusual to see in practice, yet it does occur. The ramifications for a borrower who is unable to meet the required repayments, can be unpleasant, regularly ending in repossession.

Property is not the only collateral that charging order or a ‘charge’ can be applied to. If the borrower has other funds or perhaps owns stocks and shares, a court can reclaim the owed sum through these funds as well as the property itself. If a property is sold while there is a charge against it, all money owing must be paid back to the loan company before the remainder can be paid out to the borrower.

Basically, as a result of the charge, the borrower is not the priority for receipt of any money from the sale of their house. If there is a mortgage outstanding, that will generally be paid first, then the charging order will be paid, then the solicitors fees and, if they are involved, any estate agency fees. Following this there is also stamp duty to take into account so there can be a significant loss when it comes to the borrower’s turn to receive payment.

To get a charging order the loan company must be given permission through the law courts. They will only generally be applied for if the borrower has failed to make a required payment or chain of payments within the terms of the agreed contract. Charging orders are enforced through hearings in a county court.

The county court will consider a number of things including; the debtor's personal circumstances, whether the enforcement of a charging order would inhibit other creditors from getting their debts or whether anyone affected by the enforcement has a disability or a severe illness.

If the charge is to be enforced, then the debtor can ask the court to think about a repayment approach based on the debtor's current and prospective financial circumstances. The payments can be made directly from wages if the borrower is working and the deal will not influence their employment.

Prior to choosing an unsecured loan it is advisable to check one of the various online comparison sites for the best deals. The 'Motley Fool' offers a dedicated loans comparison centre for would-be borrowers to check for the best and worst of the most recent policies.

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