Debt Consolidation Loans

The use of debt consolidation loans as a means to manage a debt problem has increased dramatically in the past five years. There are signs that the high street banks are beginning to tighten their lending criteria, as a result this option will be available from specialist lenders who will expect to charge premium interest rates.

Difficulties with this strategy –

• Can I borrow enough to cover all my debts?
• Are my circumstances sufficiently stable to guarantee that I can repay the loan?
• Will I be sufficiently disciplined to avoid the temptation of the credit cards? (In an ideal world the cards should be destroyed when the debt id paid off.)

Sadly, the reality seems to be-

• The loan is insufficient to clear all the debt, so one or two “special” credit cards are kept on. In addition, the overdraft at the bank, (never a problem in the past) is used. Within a comparatively short space of time, the credit cards and overdraft are up to the maximum.
• The interest rate will be punitive.
• Early in the life of the loan circumstances change and affect the ability to pay. The only solution often seems to be to go back to the credit cards and bank overdraft, in order to supplement the income while hopefully the problem goes away.

As a result, the majority of people who have sought the “debt consolidation” option as an exit strategy find themselves with twice the debt burden within a short space of time. That is to say, they begin with £20k (for example) of assorted loans and credit cards, try the consolidation loan, which fails and they are then faced with £40k of unsecured debts and impossible repayment terms.

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