But, as always, I feel that it's my duty to warn you of the unseen pitfalls that are associated with consolidation loans.



Now it goes without saying that you should avoid accepting consolidation loans from mysterious companies that advertise in the back of national newspapers. Many of them are only one step up the food chain from loan sharks, and their interest rates are usually astronomical.

Only consider consolidating with a reputable lender. But even then you must be very, very careful! These are two rules that you should stick to like a limpet.

1) Never borrow more money than you need to cover the loans that you want to consolidate.

2) Never borrow the money over a longer period than your current debts.

All will become clear as we continue. Just remember, if you break these rules then you're asking for bankruptcy!

Right, the first thing to do is to find out the terms of the proposed deal…to the last letter! They're not always as good as they seem.

Know how the deal works and what will be required of you both financially and practically. The more you know about the agreement, the fewer nasty surprises you'll receive!

Financial Requirements

Don't let their sales force talk you into borrowing more than you need. All their sales patter is utter fabrication that's designed to get you to borrow even more! Their slick presentations will ‘show' you how you could ‘borrow more but pay less'

They claim that the larger sum will give you more money to spend yet cost you less each month. This is a classic trick that's used to make you borrow even more. But they're just taking advantage of the fact that you'll be repaying the debt over a longer period of time at a lower rate of interest. Don't fall for it! It's a con!

Let's take a typical example. Imagine you had five different loans of $2000 each, spread over 5 years at 17% APR. They would cost you a total of $242.05 every month. So you intend to consolidate, borrowing $10000 over 5 years at 6.7% APR at a cost of $195.85 per month.

That would give you almost £50 a month to reduce the size of your debts even faster. At least that was your intention!

But you leave the consultation having been ‘convinced' (or conned) to borrow $15000 over 7 ½ years at 9.5% APR at a cost of $230.63 per month. You briefly wonder what happened, but then console yourself with the fact that you've got another $5k on the hip and have ‘saved' $11.42 a month, quite oblivious to the fact that you'll now be repaying the loan for 2 ½ years longer.

You've been conned! They must have seen you coming!

And the result? Instead of paying 60 x $242.05 = $14523 under your old selection of loans, or even 60 x $195.85 = $11751 under your intended consolidation plans, you'll now pay 90 x $230.63 = $20756.70. It means that your attempts to ‘save' have cost you $6233.70 more than you were originally paying and $9005.70 more than you could have been paying.

In effect you've just broken two of the cardinal consolidation sins that I mentioned earlier.

You've borrowed MORE money than you strictly need over a LONGER period than you needed!

Don't fall for all their lies. They may be very plausible, but then they should be, that's how they make their living! Slick, feel-good presentations that make you wonder how you could ever have lived your life without them and their ‘wonderful' products. Don't allow them to lend you any extra. Don't borrow over a longer period. It will only cost you more in interest, despite what they tell you.

Before you approach a consolidation lender, know exactly how much you want to borrow and how long you want to borrow it for. Then stick to it, regardless of what they say! And if they can't provide what you want, then go elsewhere.

Finally, use the quoted APR rates to decide which loan is better value. In many countries, lenders MUST tell you the APR if you ask.

It's also vital to know whether there are any penalties for late payments. Find out everything before you sign anything!

Practical Requirements

If the sums involved are large (normally $20000 plus), most lenders will require security, such as a mortgage over your home, before they offer you a consolidation loan.

If you accept that and fail to keep up with the repayments your house could be repossessed. Let me say that again. Caution: Your home could be at risk if you fail to keep up with the repayments!

So you must be deadly earnest about your ability to keep up with the repayments before you sign anything! You must be 100% committed to repaying the loan.

Consolidation loans should never be entered into lightly. They can help to speed up the repayment of your debts (due to the lower rate of interest), but they are the last chance saloon!

Make sure you read and understand EVERY clause of the small print before you sign the agreement.

by Stuart Laing

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