When debt takes over

If you type 'debt problem' into Google the search results list pages of firms offering to solve your debt problems, consolidate your debts, write them off or give you expert advice. But what should you really be doing when faced with problem debt?

Diagnosing the problem

If your debt situation is becoming a real problem, your first port of call should be a debt counselling service or charity rather than an IVA firm. Organisations such as the Consumer Credit Counselling Service, National Debtline or Citizens Advice Bureau will give you free advice. These organisations can help you assess your money problems and work out if youre technically in debt crisis or just have worrying or large debts. A 'debt crisis' could be defined as when you cannot afford to make the minimum repayments on all your debts and meet all necessary outgoings. Equally, you could be described as having a debt problem if you are using overdrafts, credit cards and loans to fund everyday spending on things like rent, bills and food.

Problem debts? Who can help?

Consolidations loans

Either way, a debt counselling service will be able to advise you on the best course of action. If possible it will help you work out a budget that enables you to pay back your debts as quickly as possible. In some cases consolidating your debts might be an appropriate solution. Debt consolidation allows people with a variety of credit agreements to 'consolidate' them into a single secured loan, repayable over an extended period. 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.

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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. 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. Secured consolidation loans are therefore a risky way to borrow money and they should only be used as a last resort. As well as your home being at risk there is also the danger that once you have cleared other loans and credit card balances with the consolidation loan you will simply start spending again.

Upping your mortgage

There is also the option of increasing the size of your mortgage and use these funds to repay the debt. This will be payable at lower rate mortgage rate - although probably not at the same rate as your existing deal - and you can ussually arrange to pay off the new chunk over a shorter time. However taking this route will still mean the debt will be secured on your property and so your home could be at risk if you default on what are now bigger mortgage payments.

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

25 April 2008 © Moneyextra.com

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Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.