The Dangers Of Debt Consolidation

It's an attractive idea: roll your debts into one big loan and sweep it under the carpet. But it often doesn't work that way.

Some companies offer personal loans that are specifically designed for debt consolidation. These often have relatively low interest rates, which means lower monthly payments. However, they're usually dragged out over so many years that you end up paying a fortune in interest.

So, rather than going through Debt4u or DebtsrUs, you could consider an ordinary personal loan to consolidate your payments. If your debts are currently on credit cards, such a loan could easily halve the amount of interest you pay.

By no means is this a problem-free solution though. The first danger is that once you've cleared your credit cards you'll rack up more debts on them. There's a lot of evidence which suggests that the majority of people who take out loans for debt consolidation do precisely that! With this in mind, once you've sorted out your loan you should cut up your cards and cancel them so that you don't receive any more.

The second major consideration is that you can't just roll up all your debts into one big loan and throw it over your shoulder! You have to get a grip on your finances or you'll end up even worse off. I recently wrote an article with ten tips which will get you started on the road to Foolishness: Are We Deliberately Driven To Bankruptcy?

The third danger is that you might not pay off your newly consolidated debt quickly enough. You should choose the shortest possible repayment period that you can, so that you pay less interest, get free of debt sooner and start saving quicker!

You can get credit cards with excellent interest rates for the life of any balance transfers and sometimes the interest rates are even lower than the best personal loans. However, I'm very wary of indebted people using credit cards in this way because, in addition to the temptations and problems mentioned earlier, you may also unFoolishly decide to pay the minimum monthly payments some months - or every month. Doing this you'll be in debt forever!

If you have a lot of debt already, or you've got a marred debt repayment history, you won't be able to get the best deals. Yet if you keep applying for top credit in the vain hope that you'll be accepted, you'll only make your record look worse. It's a judgement call: you have to think about where you stand, and apply for realistic loans. If you don't think you're a top-notch borrower, consider going for something slightly off the top of the market.

Whatever you do, don't even think about debt consolidation unless you have resolved to do a thorough budget check and then stick to it. Above all, be realistic about your situation and honest with yourself about your willpower.

> Visit our Get Out Of Debt Centre and compare personal loans through The Fool.