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COMMENT
Back in the mid to late Nineties, I was a decadent, degenerate "debt junkie". Indeed, thanks to what my father described as my "Champagne tastes and a beer income", plus a fiendish casino-gambling addiction, I realised at the start of 1998 that I owed almost £50,000. Aaargh! My ever-rising debts were a constant problem to me, and I often found myself "robbing Peter to pay Paul" -- borrowing from one lender to pay off another. At last, I finally came to my senses when I realised that, with three personal loans and thirteen different credit cards, I was staring bankruptcy in the face. Nowadays, sensible saving and patient stock-market investing is making me richer, so I can look back at this depraved period in my life, laugh nervously and change the subject! Still, although the underlying cause of my financial problems was my inability to spend less than I earned, I made the same silly mistake several times. My error was to roll-up existing debts into "one easy, affordable monthly repayment", which appeared to be a simple and effective way to reduce my debt-servicing costs. (Alas, this was in the days before 0% credit cards -- otherwise, I would have saved a fortune from interest-free balance transfers!) Sadly, having "cleared" (hah!) a few credit cards by rolling them up into a personal loan, I then went on another spending spree with my plastic, running up a fresh batch of debts. In the end, I had three £5,000 loans running at the same time, plus thousands of pounds on every card that I had. Hence, for me, debt consolidation proved to be a big mistake. However, I'm not the only one to fall into this trap, because it happens to almost everyone who takes out a consolidation loan. For example, this poll showed that five out of six people who took out a consolidation loan went on to build up further debts. Oops! To be brutally frank, merging your debts into a single loan only works if you've already tackled the primary reason why you're in debt in the first place. Taking out a loan and then continuing with your bad financial habits (such as overspending) will just lead to more problems. First, you need to have your "light-bulb moment", which is when, at long last, you see where your relationship with money is flawed, and how you can go about "turning the tanker around". Only once you've begun to master your money should you consider swapping expensive debts for a cheap, unsecured personal loan. Here's another word of warning: whatever you do, don't take out a secured loan (a loan against your home, also called a "second charge") in order to pay off unsecured (non-mortgage) debts. As I explained in Lessons From The Last Housing Crash, tens of thousands of homeowners lost their homes because, although they kept up repayments on their home-buyer mortgage, they fell behind with repayments on secured loans or second mortgages. Do you really want to put your home on the line purely to avoid facing up to your financial mismanagement? I thought not! Finally, although taking out a nice, friendly "homeowner loan" may appear attractive, those low monthly repayments come at a price. That's because your loan is spread over a much longer period (often 25 years), so you end up paying back far more in interest. Here's a simple example: let's say that your overdraft, loans and credit-card debts total £20,000, which you could consolidate in one of two ways: So, the only positive thing about the secured loan is that your repayments are £137 a month lower. However, its interest rate is higher, plus it'll cost you almost £12,000 in extra interest, so I'd give it the "bargepole treatment" every time! More: Check out the ow rates in our Loans centre | Visit our Get Out of Debt centre. Disclosure: Cliff owns shares in HBOS, parent company of the Halifax.
