Homeowner Loans Contributing to the Credit Crisis

By: Onome Okwuosa

Current financial trends have made it increasingly difficult for people to obtain credit, for those that have been successful at sourcing extra income chances are the price they will pay for such a service will have increased in comparison to the beginning of the year.

Interest rates have steadily risen since the ripples of the international credit crisis reached our shores, this year alone has seen the rates rise from just over 9% to close to 12% in a matter of months. The consequences of such a rise has had serious repercussions in the ways people regard their finances and the things they will do to obtain extra cash. Where last year one would have been successful in an application for an unsecured loan, now you might be offered a much higher APR or be rejected all together.

With that in mind and the current credit crisis being heavily publicised, those that need extra funds for whatever reason are looking to secure the loan against their property, a huge commitment with potentially devastating consequences if you fail to honour the agreement. The dilemma over what you value most is a personal one, do you need for the loan to have low monthly payments or is it more important for you to have the peace of mind that regardless you will always have your home? Before signing your paycheques over to such an arrangement make sure you are purchasing a product that will prove to be the best fit for you and your family.

Hundreds of thousands of people every year have turned to taking out a loan that is secured against their property; it usually comes with the benefit of lower monthly repayments and so is seen to be an attractive option. Experts however have tended to ignore the subject matter, possibly because they don't like the somewhat bitter after-taste that comes with knowing that lenders are still happy to take advantage of the vulnerable borrowers who heavily contribute to the demographic that take out 'home-owner' loans. Whether experts consider the homeowner loan to be immoral or not, they cannot deny its value in the financial sector, worth between ?5 and ?6 billion a year it is not custom any lender should ignore. With the current credit crisis its worth is expected to double in the next 5 years making it an even more attractive sector of the financial world for would-be lenders.

While it has been the credit crunch that has and will continue to heavily influence the increase in the numbers applying for secured or 'second charge' loans; lenders providing loans to those that are considered to have borderline credit worthiness may have to pay for their (dis)-honourable intentions at a later date. After all if an individuals' credit scoring is enough to raise a querying eyebrow then they are already being highlighted as a potential risk. The risks to the lender increase the worse the credit report looks, even having the loan secured against the property may not mean that much.

If the property is valued at ?80,000 and there is still ?45,000 outstanding on the mortgage as well as the ?25,000 loan secured against the property if in the future the customer decided to take out an IVA or declares themselves bankrupt a huge amount of the outstanding loan may be written off, the costs being felt by the lender. So in such an instance the debt secured against the property alone amounts to ?70,000, with fees and administrative costs this amount goes up, taking the property and selling it at auction (which will be at reduced price) at this point will not dent the overall amount owed, rather the lender's books will still show a deficit. Such knowledge goes to show that the current financial crisis has more contributors than sub-prime customers alone and that lenders have a hand in their own demise!

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