August 12, 2011

Different Types of Personal Debts

Consumers occasionally have difficulty in distinguishing between types of personal debt and loan companies can occasionally be not so helpful in outlining some of these differences. A particular distinction that's very important to be aware of is whether a personal debt is collateralized or unsecured. Take for example a situation where you're considering buying a car or another sort of automobile. There are a wide range of methods that you can have to pay for your new or second hand car. If you've got the funds available, you could pay completely in cash. Instead you may buy your car by just trading in your previous vehicle and paying the balance in cash.

Another way you can do it is by obtaining an unsecured loan from your bank or building society or even from a family friend and purchasing the vehicle using the loan funds only or in some combination with your own cash funds supplemented by the trade-in value of your own old vehicle. The loans obtained in this way are unsecured and the people who loaned you the money have no claim over the goods you bought with it, in this case the vehicle. If you obtained the loan from a bank or building society or another type of finance company you are likely to find that such an unsecured loan may be described in the loan documents as 'Credit Agreement Regulated by the Consumer Credit Act 1974' or 'Fixed Sum Loan Regulated by the Consumer Credit Act 1974'. Do not be fooled. Neither of these is a HP Agreement and if you purchase a vehicle using such a loan in whole or in part, the vehicle is now your property. The lender of the funds has no claim whatsoever over the vehicle and cannot repossess it on 'security' grounds.

However, you may find when you go to your dealer to purchase your vehicle that your dealer suggests that you take out or enter into a Hire Purchase Agreement. You need to listen carefully to the words used by the dealer and read carefully any documents provided. If you acquire a vehicle under a Hire Purchase Agreement, the vehicle is not your property – at least not yet. The words 'Hire Purchase Agreement' simply mean that you have entered into an agreement to hire the vehicle with an option to purchase. Accordingly you do not have the right to sell on such a vehicle. Even if you have paid a deposit in cash or otherwise or traded in your own vehicle as part satisfaction of the Hire Purchase Agreement, that does not make you the owner of the vehicle.

For this reason, when you go to purchase a car it is very important to know the difference between funding the deal (in whole or in part) using an unsecured loan and financing it (again, in whole or in part) by entering into a Hire Purchase Agreement – let's call it simply HP. The first thing is to question the person who is financing the sale and to ascertain if it is a secured or an unsecured loan you are being offered. When you're being offered HP, you will get the opportunity to have a look at the contract documents. Make certain that the documents are entitled 'HIRE PURCHASE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974'. A substitute title used in HP documents is 'CONDITIONAL SALE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974'. They are both acceptable titles for HP.

If you wish to be doubly sure, examine the written text of the HP agreement. The words of the agreement need to include a section called TERMINATION: YOUR RIGHTS'. This section confirms that you have a right to end the agreement and makes clear how you can and should set about doing so, if that is what you want to do. Furthermore, the text of a correct HP Agreement must also include a section called 'REPOSSESSION: YOUR RIGHTS'. This part describes your rights in the event that the HP company plans to claim the car. There are other recognized standard parts in a good HP Agreement and if the contract in front of you ticks all the boxes previously mentioned, then it's very probable that that is what it is. You'll not become the proprietor of a vehicle purchased under a Hire Purchase Agreement until you have paid all the finance payments owing under the agreement and exercised your 'option to purchase' right at the conclusion of the duration of the agreement.

If you enter into an Individual Voluntary Arrangement with your creditors, you'll have to still pay the full amount of the monthly HP payment. As a collateralized obligation, the HP agreement is just like a mortgage in that regard. The HP debt cannot be entered into the IVA unless you default on your HP payments. If you do go delinquent on your HP payments, the HP provider can, and probably will, claim the vehicle (according you your due privileges within the contract). Any shortfall that comes about would have 'unsecured' status and be entered into your IVA as an unsecured liability. At that time it would rank for dividend equally with all other unsecured liabilities.

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