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Debt Consolidation Rule Number 1 - Know Your Debt |
By Melanie Taylor
 At a time like this, it's no surprise that many borrowers with debt problems are looking to solve them with a debt consolidation loan. What is surprising is the lack of 'debt awareness' which people seem to exhibit: in a survey by CreditExpert, only 26pc of respondents were able to 'accurately state' how much they had left to pay on their loans.
Tackling a problem is never easy when we don't truly understand it - not just where it came from, but exactly where we stand today. So it's particularly worrying to note that fully 10pc of respondents admitted to having no idea how much they owed. Without understanding the debts in question, it's hard to know whether consolidating them is even the right debt solution!
After all, debt consolidation loans aren't the only solution to debt. Many people in debt could be better off looking into debt management, for example, or an IVA (Individual Voluntary Arrangement) or Trust Deed (for residents of Scotland), rather than consolidating their debts. Someone whose debts are truly out of control may even need to talk to
a debt adviser about bankruptcy.
And debt awareness doesn't end with identifying the right debt solution. Even someone who knows that debt consolidation is the best way forward still needs to understand the differences between the various debt consolidation loans available. According to the survey, an alarming proportion of the populace don't know the APR (Annual Percentage Rate) they're paying for their credit cards, loans and overdrafts. Even though the majority know what their overdraft limit is, 36pc of people 'are unsure what APR is' - something which makes it almost impossible to choose the most attractive debt consolidation loan.
"As with any financial decision, it's extremely unwise to consolidate debts without first 'doing the maths'," said a spokesperson for debt consolidation experts Debt Advisers Direct. "By reducing someone's monthly payments, a debt consolidation loan can turn an overwhelming debt problem into something they can deal with. However, it's important to weigh that immediate benefit against the long-term consequences. If someone arranges to repay a debt more slowly, it stands to reason that they'll be paying interest for longer - unless the consolidation loan's APR is significantly lower than the original debts', this can actually increase the total amount repaid. Clearly, someone who understands the importance of APR figures stands a much better chance of finding the best consolidation loan on offer."
But that doesn't mean it takes an honours degree in Finance to find the right loan. "A professional debt adviser can help borrowers make sense of their debts and their options, from understanding the small print to drawing up a budget."
Written by Melanie Taylor. Read more about the solutions to debt discussed in this article, such as debt consolidation, debt management & IVAs here.
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