The dos and don'ts of debt consolidation

If you're worried that credit card bills, overdrafts and other unsecured debts are getting out of hand, debt consolidation could be the path to financial redemption.

But you need to be committed to money management, as consolidation must be backed-up by budgetary control.

The current rate of increase in Britain's personal debt mountain is a staggering £1 million every four minutes. The Bank of England estimates that 21 million UK adults own some form of unsecured loan, whether in the shape of credit cards, motor and retail finance deals, overdrafts or personal loans - the average level of debt is over £10,000.

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If mortgages are included, then average UK household debt is nearing £60,000, says Credit Action, and the average interest paid by households on their total debt is around £3,700 per year (equating to 9% of take home pay).

But are you Mr or Ms Average where debt is concerned?

You could be an extravagant, reckless borrower who's skewing the statistics and taking the shine of parsimonious, budget-conscious individuals, and who is responsible for some of the over 7,700 loan repayments that go unpaid every day.

You might belong to that select group of 1 in 16 people in the UK who devote more than 25% of their monthly income to paying off unsecured debts, says Chiltern Financial Management. If this is the case, then Government guidelines say you are at risk of over-indebtedness.

So to fight fire with fire, what can you do to take control of a severe debt problem? A combination of budgetary skills and the right consolidation loan could be the answer. But proceed with caution, and take control of your spending. There is no point consolidating your debt, and working to wipe it out, only to repeat the process - this can lead to a dangerous debt cycle.

What is a consolidation loan?

Consolidating debt should save you money, as it is a way of moving a range of expensive debts (and it doesn't come more expensive than credit cards unless you're in hock to a loan shark) to a borrowing vehicle with a lower interest rate.

Do you want to reduce your financial outgoings? Try our consolidation loan tool to see if you can keep more of your money.

But note that many consolidation loan borrowers go on to accumulate further debt. Although 25% of such borrowers manage to clear debts early because of this financial strategy, three out of five consumers opting for consolidation loans end up generating more debt.

18 October 2007 © Moneyextra.com

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