By Sharon Jacobsen
April 13th, 2005
According to Sainsbury’s Bank, debt consolidation is predicted to be the top reason for borrowers to up personal loans this year.
Forecasts indicate that almost 1.5 million Brits will borrow nearly £12 billion purely to be able to pay down their existing debts.The figures are comparable to the US and other developed countries.
Companies offering to clear you credit cards and other small loans by bundling them into easy to manage monthly payment seem to be popping up all over the country. And their advertising is persuasive.
That it makes sense to re-finance certain debts by taking up cheaper loans isn’t being questioned but people are being fooled into believing that something’s actually “being cleared”. It isn’t. What’s really happening is the movement of debt from one place to another. That few institutions are involved doesn’t mean anything’s gone away.
Interest rates on consolidation loans are often “variable”. Where does that leave the borrower? With an uncertain future without any real indication of what kind of interest he’ll be expected to pay, that’s where. These loans are often long term – how else could they drastically reduce those monthly payments? – so likely to prove expensive in the long term. And as if to add insult to injury, the loan will be probably be secure on the family home meaning your home is at risk if you do not keep up repayments.
While the consumer is seduced into believing these credit institutions are helping them, all they’re really doing is stuffing their pockets on the back of our overspending. Regardless of your credit history, a company’s out there waiting to “help” you. There’s no risk for them as long as they have property as collateral but the risk to the consumer is high – very high!
In our society where capitalism rules supreme and most people are still trying to keep up with the Jones’s, it’s hardly surprising that credit card debts re-accumulate after they’ve been transferred to a consolidation loan. Our want, want, want mentality keeps us in financial deep water while the credit companies smile greedily.
Consolidation loans have their place but only if the borrower truly wants to get out of debt. The loan should be for a short a period as possible and definitely not secured on property unless there’s no doubt repayments can be made even if a loss of work should incur. See also securing home loans. And to make sure things don’t go from bad to worse, any cleared credit cards should be returned to the issuing bank with instructions to close the account.