Unsecured loans are known to be much friendlier than secured loans in that they involve no risk of losing assets. This feature is promoted in advertisements to make them appealing to borrowers who tend to meet unexpected or planned expenses. The approval hinges on your income sources and credit report. The more impressive your credit report and financial condition are, the lower interest rates you will qualify for.

Most of the borrowers are under the impression that they do not need to panic about losing their personal assets in case of a default, although implications such as a credit score loss and late payment fees are ineluctable.

But the most intriguing feature of these loans is that they could be transformed into secured loans by obtaining a charging order from the court by your lender in case of a default, which enables them to liquidate your property in order to get hold of their money.

Unsecured loans in the UK do not have to be exorbitant as long as you continue to repay the debt on time. Small personal loans aimed at funding emergencies are required to be settled on the due date in fell one swoop. However, long-term loans are paid back over an extended period of time.

Unfortunately, the consequences of default or late payment fees are adverse and have far-reaching effects. Not only will you significantly lose your credit points, but your account will also be sent to collection agencies. It could be a tormenting experience to attend to their phone calls, reply to their messages and, above all, adhere to their proposed payment plans, but what if you still refuse to pay off the debt? Does that mean your lender cannot obtain their money back just because the loan is not backed by collateral? Thereby hangs a tale.

Your lender will take you to court

Your lender could exercise legal action if your account is in default for three months. Bear in mind that they have the contract bearing your signature, which means you consent to all terms and conditions. The contract gives your lender the right to file a lawsuit against you, no matter whether you borrowed up to £500 or £5,000.

Unsecured loans are assumed to be less risky, but as a matter of fact, they are not if you fail to meet your obligations on time. Collection agencies are the first tactic they use to motivate you to repay the debt, but if you still refuse, the matter is taken to court. As a result, a county court judgment is issued against you.

Now, the court will order you to settle the debt as per a proposed payment plan. Ideally, you should discharge your debt within a month to avoid a record of a county court judgment on your credit file. Otherwise, it will keep appearing on it for six years. You cannot avoid its record on your credit file if you take more than a month to settle your dues.

There is a possibility that you fail to pay off the debt as per the court orders. In this case, your lender will ask the court to release a charge order, which asserts that the unpaid amount of the debt will be paid from the proceeds of the sale of your house. Once the charge order is passed, your unsecured loans and credit card bills will suddenly become secure. They are treated like a mortgage. As a result, your house is used to release the unpaid amount, provided your existing mortgage will have the first charge on your property.  

How does the charge order work?

It is vital to understand that a charge order will not result in an immediate and forceful sale of your property., but once the order is released, your lender would seek permission from the judge to grant an order for sale to obtain their money back.

You still have the right to stop the liquidation procedure. In each hearing, you can advance a number of arguments in order to halt the sale. For instance, you are ill, or you have a family, or you do not own a complete share of your house. The court will grant you an opportunity to prevent your property from being sold. However, at the same time, the court also expects you to settle your unpaid account.

Of late, there has been a surge in charge orders, but there is no data on how many orders have been converted to orders for sale. However, when lenders’ opinions are sought on this, they completely deny that they rush to the court to obtain orders for the sale of the property. Though they have an ace up their sleeves, they only threaten borrowers in the name of a charging order without any intention of moving to an order for Dale.

Remember that various lenders are out there who use their unique tactics to collect payments. Some lenders are known to use more daunting practices such as showing up on your doorstep at unexpected times, disseminating information about your non-payments in the neighbourhood and strongly condemning your comportment. These tactics could prove harassing, especially if you intend to pay back the debt but are unable to. Some lenders might be more ruthless. They may use some illegal tactics.

Indubitably, the risk of default is quite high in the case of an unsecured loan, so there is a likelihood that your lenders require you to make an upfront payment as security, which is refunded after the clearance of the debt. Your lender will repossess the secured amount if you fail to meet your obligation on time. You may find some lenders relying on this method in spite of promoting themselves as lenders charging no upfront fees.

The final word

Personal loans cannot be transformed into secured loans unless the lender seeks a charge order from the court. It is normally issued against borrowers against whom a county court judgement had been issued before. However, your property cannot be repossessed until your lender has an order for sale.