Debt consolidation can lead to further debt accrual

12 September 2007
A new study from moneysupermarket.com has shown that approximately two-thirds of people in the UK who have taken out a personal loan for debt consolidation purposes have ended up getting further into debt.

According to www.creditaction.org.uk, consumer credit lending currently totals £214 billion, with personal debt in the UK increasing by £1 million every four minutes.

Head of loans and debt at moneysupermarket.com, Tim Moss, said: “Debt has become the common curse of modern times. People need to be careful that the ease of getting credit doesn't catch them out. It can soon spiral into a debt sentence.”

The new moneysupermarket.com report shows that 12.7 million people in the UK, or 28 per cent, have taken out a loan in order to merge some or all of their existing debts. Worryingly, 8.4 million of these people, or 66 per cent, have incurred more debt.

Mr Moss said: "Taking a personal loan to consolidate debts can be a useful way to get your finances under control. But a loan for these purposes should be considered carefully and only regarded as a measure for becoming debt-free – not as a license to go spending again.”

Five per cent took on an additional loan while still paying off the original loan, 12 per cent used money from their overdraft, 28 per cent incurred credit card debt and 21 per cent used a combination of these measures.

Around one-third (31 per cent) of those that had consolidated debt reported that they felt trapped by debt or that they are not in control of it, while a mere 13 per cent felt it was a positive move. Just over a quarter (26 per cent) of consolidators believe they will always be in the red, but that they feel comfortable managing it.

Mr Moss commented: “It is in consumers’ best interests to realise the important implications of taking on debt and only consider a loan for a specific purchase, such as a car or as a last resort to manage their debt.”

“With banks increasingly feeling the pressure of consumers defaulting on their credit arrangements, we can expect them to start tightening their lending criteria and pushing personal loan rates higher," he warned.

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