Why do people take out debt consolidation loans?

It is difficult to obtain complete data on the reasons people take out a loan and for what purpose. Not all lenders collect this information systematically anyway, and borrowers do not always give the reason or reasons why they have taken out a loan. This is especially the case for debt consolidation.

However, according to an OFT study from 2004, debt consolidation was found to be the most important reason given by UK individuals when they applied for a secured loan.

In 2002, nearly half of secured personal loans were taken out for the purpose of debt consolidation, with a total amount estimated to be almost £9 billion, compared with £2.4 billion in 1999; an increase of over 70% over three years.

Nearly 8 million people transferred the balance of their credit cards in into a loan of some sort 2001, with a total amount worth £13.6 billion. It has been estimated that 15% of these credit card transfers involved debt consolidation. The survey of UK consumers also found that nearly 40% of people who had taken out a debt consolidation had already done so before. Nearly half of these had taken out repeat consolidation loans with a gap of two years between each loan.

With regards to the demographical picture, it was found that most of the people taking out a consolidation loan were younger people, and individuals in full-time employment.

Individuals who take out a debt consolidation loan tend to vary in their financial circumstances. Some will seize an opportunity to take advantage of any improved terms that might be available by consolidating their debts to a single, secured loan.

Others might simply be struggling to cope with their debts.  This might be because they have perhaps taken on more than they can afford and subsequently need to spread out their repayments over a longer period.

Whatever your personal situation, it is important to realise that debt consolidation is not an “easy” short-term option if you are struggling with debt problems. Used sensibly though, a consolidation loan can be used to pay off other debts, as well as help finance a new car, home improvements and so on.

For some people though, a consolidation loan can make their existing problems worse. If you have serious debt problems you may be better off in the long term by applying for an Individual Voluntary Arrangement  (or IVA), or in some circumstances, even bankruptcy If you are serious debt problems, you should talk to a Licensed Insolvency Practitioner. Many consumers lack awareness of all the options open to them, and it can help to seek professional advice as to the alternatives to a debt consolidation loan.

If you would like more information, ring Debtsolver now on Telephone 08000 434 336 (Free for UK residents only).