The ins and outs of debt consolidation

In a climate of rising interest rates, people with a number of loans and debts with different companies might find they are struggling to pay what they owe each month. Debt consolidation companies tout debt consolidation loans as the answer. If you watch daytime TV you will see a whole host of adverts from debt consolidation firms suggesting that one quick phone call could be all it takes to solve your money problems and while you're at it, you may as well borrow a bit more and spend it on a new kitchen or holiday.

Rising trend

The ads are clearly having a positive response as, according to a survey by MSN Money, nearly half of the loans taken out this year are for debt consolidation rather than holidays or home improvement. Debt consolidation allows people with a variety of credit agreements to 'consolidate' them into a single loan, repayable over an extended period - and often secured against your property.

The interest rate is usually significantly lower than the rate charged on credit card balances, but the sting in the tail is that because the loans are taken out over a longer period of time, you end up paying more interest overall.

Your home (or wallet) is at risk

Most debt consolidation loans are sold to people who own their own homes and so are often referred to as 'homeowner' loans or 'secured' loans. This means that the loan is secured on your home and if you cannot pay it back your property may be in danger of being repossessed. With unsecured credit agreements, such as personal loans and credit cards, lenders have no such security and so charge higher rates.

03 August 2007 © Moneyextra.com

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