FOOL'S EYE VIEW
Consolidate Your Debts?

By Alan Oscroft
June 14, 2001

Liverpool -- We've all seen the ads on the telly. "With our help, Mr and Mrs Owetoomuch got their debt repayments down from a million pounds to just fourteen pence a month". OK, I exaggerate, but you know what I mean.

If you've got credit card debt and find it difficult to make much of a dent in it, it's likely that you have thought about a "consolidation" loan before. But is it a good idea? The answer really depends on you. Are you genuinely committed to getting those damned credit cards out of your life for good?

Interest Rates

The obvious thing to compare is interest rates. With credit card rates typically coming in near the 18% mark, unsecured bank loans can be had for around 8-9%. Over the long term, that could make a huge difference to the total amount of money you end up repaying. On that score, getting a consolidation loan and using the money to clear your credit card debt looks like a very good idea. But there's one big difference between paying off a loan and paying off a credit card.

You Can't Spend It

How much do you pay off your credit cards each month? Just the minimum? And then what? Do you go out and top them right up again by spending more money on them?

Well, you can't do that with a bank loan. Once you've paid your monthly instalment, there's no getting it back. You can't wander into a department store and wave your loan statement under an assistant's nose saying "just stick it on there, will you".

So what would you do? Would you make your debt payment and then go out and spend money on your squeaky clean empty credit cards?

If you can't stop spending on your cards, getting a consolidation loan can lead to much more trouble in the long term, and it's where a lot of people continue to fall down. A few years down the line, will your credit card debt be back up to its old level? If it is, you'll be in a far worse  situation because you'll still have that loan to pay too. You might be surprised at the number of people who dig themselves even further in debt and end up borrowing even more money to consolidate all their previous consolidation loans.

If you are serious about reducing your debts, you must be prepared to cut up those credit cards immediately after clearing them. Your focus is then to pay off the loan.

Who To Borrow From

There are plenty of lenders out there who would be delighted to lend you some money. But, you know, there's one kind of company that you might want to avoid. And yes, I'm talking of the ones who advertise on telly. Don't be seduced by that beaming couple saying "Oh, thanks to DebtMangler Loans we won't have to sell the children. And we can have that expensive holiday after all." Don't reach for the phone. Don't call that 0800 number.

Instead, arm yourself with a copy of yesterday's Fool's Eye View and go and talk to your bank manager. And sharpen your scissors.

The Right Aim

Do you know what's also wrong with those TV ads? Their focus is on getting your monthly repayments down as low as possible. They do that because it leaves as large a debt as possible outstanding for as long as possible, and that secures a nice steady long-term income for themselves. If you're serious about debt reduction, what you should really be aiming at is getting your total debt down as quickly as you can.

So, if you decide to get a consolidation loan, don't go for the longest repayment period possible in order to minimise your repayments. Instead, go for the shortest period you can comfortably afford, aiming to get the loan paid off quickly.

More:

* Yesterday's Fool's Eye View gives the low-down on how to get yourself a personal loan.
* The Fool's Get Out of Debt centre contains loads of useful stuff to help you, er, get out of debt.