COMMENT

Why Consolidation Loans Aren't Always The Answer

By Jane Mack (TMFJane)
March 28, 2006

A few years ago someone ran a poll on our Dealing with Debt discussion board to find out what proportion of people who had consolidated their debts with a loan had subsequently run up further debts. Of those who responded 84% had found themselves in debt again.

Around seven in 10 loans are redeemed early and I suspect one of the main reasons is that borrowers are simply consolidating yet again. And that's why I think people should be wary of loans used to cover other debts.

Unfortunately, it's all too easy to think that they're the answer to debt problems. If there's anything that's guaranteed to make me want to throw something at the telly, it's those adverts that try to persuade you to 'clear your debts' by taking out a consolidation loan.

There's usually the promise that you can get rid of your debts and take a lovely holiday in the Caribbean/buy a new car/replace your kitchen as well. And by taking them up on their offer, people are of course simply moving their debts from one or more lenders to another and being tempted to increase their debts while they're at it.

There's nothing wrong with a consolidation loan as long as the borrower uses it to get out of debt! Preferably it should be unsecured ie: don't use your home, and it should be for as short a period as possible with a fixed interest rate so you know exactly what you're committing yourself to.

And then hide your credit cards or, better still, cut them up. The fact that the loan has been used to pay off the cards means that it'll look as if you suddenly have a whole new load of spending power and that can be way too tempting for some.

So, ignore the adverts on the telly, find the best deal available for you and don't, for goodness sake, borrow extra just so you can have a holiday! Remember you'll be paying for it long after the tan's worn off.

Find how to Pay Less for Your Loan and check out the deals in our Personal Loans centre