Consolidation loans: No quick fix

Tuesday, 05 February 2008 12:00

Taking out a consolidated loan to cover debts is not a quick fix solution and could be the start of a serious financial problem, warns consumer watchdog Which?.

Phillip Inman, author of Which? guide Managing Your Debt, explained interest rates on consolidation loans - those taken out to bring all debts together in a single package - are often higher than standard loans, so those in debt troubles often end up repaying far more money.

Furthermore, consolidation loan companies often charge arrangement or set-up fees which are added to the loan, making the total debt greater still.

Secured consolidated loans also put a borrowers home at risk if repayments are not met, Mr Inman warned, something many of those taking out loans do not realise.

"People often mistake consolidation loans as the 'quick fix' solution to their debt problems," Mr Inman said.

"They are sold as a method of paying back debt in one easy payment each month. However, people choosing this option tend to pay back much more than they originally owed."

He added: "On top of this, there is evidence people taking out these loans are not addressing the real issues behind their debt, and soon slip back into poor money management - risking their homes at the same time."

"Anyone considering taking out a consolidation loan should first look at why they are in debt, and take steps to sort this out, rather than rushing to take out a high cost, high risk loan."

He also raised the problem of high early repayment charges on consolidation loans, making them hard to escape from if someone's finances do recover.

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