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21st May 2007
A recent survey carried out into the effectiveness of consolidation loans in the UK has shown that in many cases debt levels for consumers are actually increased.
This isn't because a consolidation loan is not an effective tool to help consumers to manage their finances more easily or reduce monthly repayments, but is because it gives the consumers more scope to borrow again.
The survey, which was carried out by Fool.co.uk, revealed that over half of the people that took out consolidation loans in order to wrap up smaller debts ended up getting even deeper in debt within a short period of time.
According to the survey results three in five of those taking out these loans soon accumulated more debt. One official from the site stated: "Consolidation loans can be a welcome lifeline for people caught in financial difficulties. But the lifeline can quickly turn into a noose if you submit to the temptation of running up further debts."
Many industry professionals believe that consolidation loans can be effective if used in the right way, but consumers that take these loans have to be strong willed and must resist the urge to give in to temptation.
Using a consolidation loan to pay off smaller unsecured loans and credit cards can save the consumer money on a monthly basis as well as saving them a small fortune in interest.
However, those that go on to then spend again once the credit cards, store cards, etc have been cleared then face the prospect of repaying the original debts as well as the consolidation loan.
Those taking out a loan to consolidate their smaller debts are urged not to start spending again on their cards or take out further loans.
The purpose of a consolidation loan is to cut back on the interest being paid to other creditors, cut back on the number of monthly repayments that have to be made, and reduce monthly repayments.
Experts advise that these loans should not be considered a solution to clearing other debts so that they can be racked up again.
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