All together now
We've
all seen the adverts - on billboards, on the tube or in the back of newspapers
- covered in exclamation marks and splashy slogans telling us to "Clear all
your existing credit!!!" and "Save £££s now!". Christmas is over and the credit
and store card bills are flooding in - at different times of the month and with
different interest rates. And companies appear to be queuing up to lend us money.
Is it a good idea to do what the adverts tell you and consolidate your debts?
The idea behind debt consolidation is that you take out a single, large
loan and pay off all your existing debts, including store cards, credit cards,
loans and overdraft. This bigger loan should be offered at a lower rate of
interest and you will invariably have the option to pay it back over a longer
period of time.
Sounds like a good idea? It can be, but it's worth exercising extreme caution
when it comes to deciding which company to approach when you're looking for
a loan: the impressively low headline rates in the ads at the back of magazines
are rarely as good as they seem.
On the surface, the companies promising to "make your life easier" by reducing
your debts do appear to be offering reasonable loan rates, averaging from
around 10.9% APR on loans of £5,000 to £12,500, and falling to 7.9% on loans
of £35,000 or over. However, a couple of phone calls soon reveal a very different
story. When I approached one of the companies listed in the back of the newspaper
and pretended I wanted a loan of £5,000, the first question I was asked was
whether I was a homeowner. On answering no, the operator told me that the
company only offered loans that could be secured against property - so I wasn't
eligible for their advertised rates. She put me through to another company,
which she told me would "deal with tenants". The second company refused to
tell me the rates they would offer me over the phone, but acknowledged that
they would be "somewhat higher" than those advertised in the paper.
Even if you are a homeowner, and therefore qualify for the advertised rates,
you should think twice about securing a loan against your house. Never forget
that if, for whatever reason, you are unable to meet your loan repayments,
you could end up losing your property. "We would seriously discourage people
from securing unsecured loans, as it's possible they could get to the stage
where they lose their home," said a spokesperson for the National Debtline.
In general, the National Debtline's position on consolidation is far from
enthusiastic. "It's usually not a good idea to replace one loan with another
and pay interest on interest," their spokesperson said. "Although the rates
can seem attractive, the repayment periods are generally so long that you
end up paying two or three times more than you borrowed in the first place
in interest."
For example, had I been in possession of a house and borrowed £5,000 from
one of the loan companies, then repayed it at their lowest advertised rate
of £46.95 a month over 300 months (25 years) I would have ended up paying
back a total of £14, 085 - almost three times the original amount.
So is there ever a case for consolidation? Actually, yes. Although the National
Debtline is dubious about the value of debt consolidation, it does recognise
that there are some people for whom it can work: namely, people who are generally
reasonably solvent but who, for one reason or another - Christmas, perhaps
- have simply got in over their heads. "We don't normally encourage people
to refinance - especially with a secured loan," said the Debtline's spokesperson.
"But if you are going to refinance it's vital that you shop around, look at
exactly what you'll be paying out and make sure you get the best deal."
The key to successful debt consolidation is therefore finding the right loan.
If you do your own research into loan rates you may find that sticking
your credit card, overdraft and loan debts into one loan does cost you
less in the end. The bigger the loan you have, the lower the interest
rate will be, so in that sense it can work out cheaper to pay a low
interest rate over a longer period of time than lots of high interest
rates over shorter periods. When you've researched the cheapest loan
rate available, you can use Guardian Unlimited Money's debt consolidation
calculator to work out whether or not you'll be better off in the long
term.
Your first port of call should probably be your bank, who may well
be prepared to negotiate a good rate for a loyal customer. If your bank
won't offer you the sort of rate you're looking for, however, you could
use Guardian Unlimited Money's Compare & buy loans comparison calculator
to source a competitive rate. The best unsecured personal loans on the
market at the moment are from Northern Rock and Liverpool Victoria who
are both offering loans with 6.9% APR.
Debt consolidation doesn't always have to be in the form of a loan. Egg is
currently advertising its credit card with the opportunity to roll all your
other credit card, store card, loans and even overdraft rates on to its card
with a 0% interest rate for 6 months. Although it has a low interest rate
of 13.9% after this period, if you're not going to clear this huge new loan
for a while you might still be better off with a consistently low loan rate
which also forces you to make regular payments.
Debt consolidation doesn't offer a magic wand to make your debts disappear,
but if you research the market it can be a way to reduce the amount
you're paying out every month, without leaving you out of pocket in
the long run.
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