FOOL SCHOOL
Consolidating Your Debts

August 22, 2003

These days it seems that you can hardly turn on the TV without seeing an advert with the promise of "consolidating all your debt payments into one, manageable monthly sum". So what's the deal?

The basic trick is that all your debts are bundled into one, and an agreement is made to pay them off over a longer time frame. This is the principal reason why the monthly payments appear so much lower. But paying off your debt slowly may not be in your best interest. It might be easier to meet the monthly payments but it will end up costing you a lot more in the long run.

Many of these lenders are targeting what they refer to as the 'sub-prime market' or the 'credit-impaired'. This refers to around one-quarter of the UK population who find it difficult to get a loan from a major High Street lender because they don't have a good credit record.

Very often the debts will be secured on your property but you will still be paying a high rate of interest. The commission that brokers get paid for referring some of these loans can be very high and one way or another that means higher charges for you at the end of the day. It pays to shop around and compare all the charges. You may be able to get a better deal without securing it on your property.

Consolidating your debts focuses your attention on paying down one single debt rather than trying to keep up with several, smaller ones. Typically the interest charged on the one loan should be lower than you would have paid on your debts beforehand. It can be daunting to see how much all your loans amount to when grouped together but ignoring the problem just makes it worse. Like most personal finance situations it boils down to whether you can get a reasonable deal, taking all the charges into account. We look at the factors you need to consider in 'How To Choose A Personal Loan'.

Don't fall for this one!

Many people assume that once they have bundled their existing debts into one little package they have somehow drawn a line under them and cleared them off. Nothing could be further from the truth. It is well known that a high proportion of people who take out loans to consolidate their debts go on to run up further debts before they've cleared the first lot. Although it's tempting to go off and start spending on that newly cleared credit card again that is the worst thing you could do in such a situation. This merely adds to your problems. It's estimated that the majority of people who take out a consolidation loan actually end up further in debt. To get some practical views from people who have fought against the ogre of debt and won, check out our Dealing With Debt board.

> Compare loans in our Personal Loan Centre