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1 in 4 Borrowing To Consolidate Debt Go On To Borrow More.
A quarter of people taking out a loan to consolidate their debts go on to borrow more, according to a survey commissioned by Uswitch.
26% of those who do not close existing debts when consolidating borrow on average a further £2,221.
Uswitch says that 1.3 million such debt consolidation loans were taken out in 2007 to people aiming to manage debt in one package. It called on lenders to issue more warnings about the dangers of failing to pay off other debts.
Consolidation loans have proved controversial, with experts claiming that many actually push households further into debt.
We believe you don’t need to be an expert to see that. The misconception of a debt consolidation loan is that the debt is cheaper. Not so, as the payments are normally spread over a longer period your remain in debt longer and eventually payback more.
We speak to people all the time who are “serial debt consolidators”.
For example they owed £20,000 and took out a £20,000 consolidation loan, but they only clear £15,000 of the existing debt.
They blow the extra £5,000 thinking this is their money they have somehow earned. A common justification is “I’ve been so good in paying off these debts that I’m rewarding myself with a holiday/shopping binge etc.
The reality is more debt. Including the interest repayments, their debt is now often around £40,000. Worse still the debt is secured on their property so they risk repossession should they not be able to maintain payments. Debt Management would have been a better option as their debts are reduced, not increased.
Chancellor Alistair Darling said last year that he was keen to look into the claims made in daytime television commercials advertising these deals.
