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Banks turning unsecured loans into secured ones

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The OFT has slapped the wrists of RBS and NatWest for being too keen on using charging orders, which turn unsecured debts into secured ones. And that can put your home at risk.


Most articles you read about unsecured loans and credit cards state a glaring falsehood – that your property is safe if you're unable to pay your bills.

A timely piece of news has once again made clear just how wrong that is.

The Office of Fair Trading has taken firm steps against NatWest and Royal Bank of Scotland. By doing so, it has revealed the harsh reality that lenders can turn unsecured loans into secured ones with ease.

It's dead easy to do

Lenders can convert unsecured debts – such as from unsecured loans and credit cards – into secured ones if you fall behind on repayments. It can do this by applying to the court for a “charging order”. The court has no discretion to refuse this request so long as it is made without errors.

I interviewed a debt collector some years ago who said that charging orders aren't issued willy-nilly or even as a matter of routine, but they are a tool that is used frequently and without qualms by some lenders and debt collectors.

You aren't always given a chance

On top of that, some lenders are applying for charging orders before they even give debtors with temporary problems a proper chance to turn their finances around. This is what the Office of Fair Trading (OFT) concluded about Royal Bank of Scotland and its subsidiary NatWest.

Specifically, the consumer and competition authority found that the banks did not consider customers' personal circumstances, such as their efforts to repay debts using a debt-repayment plan or other method, and they were imposing charging orders on small debts, sometimes less than £5,000.

The OFT has imposed requirements on the banks to consider:

  • the efforts of the customer to repay debt
  • the size of the debt
  • the personal and financial circumstances of the debtor (such as their assets)
  • the length of time the money has been owed
  • whether it is reasonable to take alternative steps to recover the money.

David Fisher, OFT Director of Consumer Credit, said: “Where we consider the use of charging orders to be unfair or oppressive we will take action to protect consumers.”

Usually, you can still keep your home

The good news is that a charging order just gives the lender a right to its share of your property when you sell your home; it doesn't force you to sell your home before you choose to.

However, after getting a charging order on a credit card debt or unsecured loan, a lender can apply to the court for a forced sale in exactly the same way that your mortgage lender or secured loan provider could.

The court is far less willing to grant orders that force a sale and the judge has discretion to reject these applications. If you have just £5,000 of credit card debt, for example, but a property worth £150,000, the judge is highly unlikely to agree that you should be forced to sell your property. He or she will also take your personal and family circumstances into account, which means not kicking children out onto the streets.

What to do if you're treated unfairly

If you think a lender or debt collector has treated you unfairly, perhaps by getting a charging order or threatening you with one, you can complain to the Financial Ombudsman Service. This free service can force banks to compensate you. Read Financial Ombudsman Service: how to complain to the FOS.

More from Lovemoney:

Secured loans: pros and cons

Where to get free debt advice

Financial Ombudsman Service: how to complain to the FOS.

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