Debt consolidation is a way of combining all your individual debts from various sources, such as credit cards, overdraft, personal loans, etc, into one. This way you deal with just one creditor instead of many and therefore make one payment a month instead of having lots of different bills. But is debt consolidation recommended by lenders for the right reasons? You decide!

The following information has been taken from the Office of Fair Trading website and I quote.

" The OFT estimates that, in 2002, ?32 billion of unsecured lending and ?8.8 billion of secured personal lending were used for debt consolidation. This compares with an estimated ?18.4 billion of unsecured lending and ?2.4 billion of secured personal lending in 1999. The value of credit card balance transfers in the first ten months of 2003 was ?13.6 billion, compared with ?11.6 billion for the whole of 2002. Not all of these transfers will be debt consolidations. Mori Financial Services (MFS) estimate that about 15 per cent of all transfers involve consolidation of more than one credit card balance."

From this information, we can gleen that debt consolidation is growing at an alarming rate and we are talking about ?50 billion.

There are many reasons for considering a debt consolidation loan but generally debts are consolidated to reduce outgoings by either placing the new loan over a longer tem or by reducing the interest rates paid by moving to a lower interest rate and paying the loan back quicker. So on the face of it, these are positives but there are negatives also.

?Are you moving the loan from an unsecured to a secured loan?

?Are you moving from fixed rates to variable rates?

?How much will you repay over a longer term?

?Will you pay extra fees that are added to the loan?

?Will you have to take out Payment Protection Insurance?

?Is the loan flexible for over and underpayments?

There are many UK organisations that offer debt consolidation in different guises and often famous people are used to promote these on the television and national newspapers. Care should be taken when approaching these lenders as often they will make it appear that acceptance of the debt consolidation loan will be subject to you taking out a single premium Payment Protection policy that will be added to your loan.

This could be seen as follows:-

Debt consolidation loan amount ?18,000

Payment Protection Insurance ?4,500

Actual loan advanced ?22,500

You will then be asked to make monthly repayments based on the ?22,500 figure. The lender will not only make interest on the legitimate loan advance but commission of around ?2,500 on the Payment Protection Insurance plus interest on the insurance premium. Are we then surprised that they make billions of pounds of net profit per year?

Another scam recently uncovered was a national high street bank converting clients existing overdrafts to an offset mortgage by consolidating the overdaft with the mortgage. The client is told that it will reduce the monthly outgoings but are not told that what was a flexible short term overdraft has now became a long term secured loan and it now theatens the security of the home.

The Financial Services Authority does not regulate Secured loans, debt consolidation loans, personal loans, student loans, overdrafts that are below ?25,001 and this can mean that the ?50 billion can be easily attacked by the big lenders.

Debt consolidation used correctly can mean saving thousands of pounds for the astute individual but only if it is done correctly and for the right reasons.