About Expensive Unsecured Loans

 

Many lenders offer large unsecured loans with high interest rates. With the interest front-loaded at the beginning, it can be a long and expensive journey to fully repay the account.

 

High Street banks offer some unsecured loans with a low APR in the 3% to 4% range, but you’re only going to qualify for them if you have an excellent credit rating.

 

By contrast alternative lenders provide credit at vastly higher rates of interest. At the time of writing the representative APR provided by Everyday Loans (99.99%) Selfy (99.99%) Drafty (89.7%) Progressive Money (61.91%) Likely Loans (59.9%) and 118 118 Money (49.9%) compare very unfavourably with the major banks.

 

Please note that we separately cover the subject of guarantor loans.

 

Problems with High-Cost Loans

 

Unsecured loans are often used to consolidate debts. Debt consolidation can be helpful and reduce overall monthly costs, but new debts often build up again leading to a much more serious debt problem.

 

Because the monthly repayments are often large, it can be a struggle to keep up with them in the long-term. This can become an impossible challenge if your income is disrupted for a period of time or if you’ve already fallen into arrears or default with other types of credit.

 

Debt Solutions for High-Cost Loans

 

If you cannot pay your loan, a range of debt solutions are available.

 

A debt management plan aims to reduce your monthly payments (to an affordable amount) and to clear your debts over a reasonable period of time. For more serious debt problems, various forms of personal insolvency can result in some (or all) of your debt being legally written-off.

 

Debt Management Plan

 

In a debt management plan you reduce your monthly debt payments. This carries on until your debts are fully repaid. It’s a flexible type of debt solution that can adapt if your own financial situation changes.

 

Lenders often agree to suspend interest and charges. This is a huge benefit with credit card debt (for example) as otherwise the amount owed might continue to increase. Personal loan interest works in a different way. Loans often have front-loaded interest applied to the balance at the start. You agree to pay back a fixed sum of money which is larger (sometimes much larger) than the amount of money you actually receive. For example, under a loan’s credit agreement you might borrow £5,000 at the start and then repay £8,000 over the repayment term.

 

If you use a debt management plan, you’ll probably still have to pay back the full £8,000 as any front-loaded interest will not usually get removed. The lender will however often provide you with support by agreeing to accept a reduced monthly repayment, not adding further interest or charges, and not using legal measures to recover what is owed.

 

If you live in Scotland, you can access a more formal and beneficial type of debt management plan known as the Debt Arrangement Scheme.

 

IVA

 

You repay what you can afford for an agreed period (which is often five years). When you complete your IVA payments any unpaid debt gets legally written off. High-cost unsecured loans are included amongst your IVA creditor list.

 

The same principles apply to protected trust deeds in Scotland (which last for a minimum of four years).

 

Bankruptcy

 

In bankruptcy, you’ll be required to make a payment (if you can afford to) for three years. The bankruptcy repayment term in Scotland is four years.

 

Any unpaid debt gets written off when you get discharged from your bankruptcy. High-cost unsecured loans are included amongst your bankruptcy creditors.

 

Debt Relief Order

 

High-cost unsecured loans are also included in a Debt Relief Order (DRO). A DRO is available to those with low disposable income, few assets, and a total debt of £30,000 or less (in England and Wales). Your debts get written off after one year.

 

Affordability Complaints on Unaffordable Loans

 

Some people are lent more money than they can actually afford to repay. A lender should check that a loan is affordable before lending to you. If they did not make proper affordability checks, it might be possible to get the loan’s front-loaded interest written off. You’ll still usually need to repay the funds that you actually received.

 

The starting point is making a complaint directly to the lender. If you’re unsatisfied with the firm’s handling of your complaint, you can escalate the matter to the Financial Ombudsman Service.

 

Further guidance on making affordability complaints is available via Debt Camel where you’ll also find useful template letters that you can adapt as required.

 

Get Debt Advice

 

Our experienced and friendly team can advise you about your debt solution options. We’ve assisted numerous customers with debts owed to lenders like Everyday Loans, Selfy, Drafty, Progressive Money, Likely Loans, and 118 118 Money

 

For expert debt help and support please contact us.

 

 

Author: Andrew Graveson – Qualified Debt Adviser & Bright Oak’s Founder

 

Last Updated: 21/06/2021

 

 

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