Stuck in a 'debt sentence'

The majority of people who take out a personal loan to consolidate existing debts go on to build up more debt and struggle with the consequences.

Research commissioned by price comparison website moneysupermarket.com shows 28 per cent of Brits (12.7 million people) have taken out a loan to consolidate some or all of their existing borrowing.

Worryingly, of those who took out a personal loan to merge their existing debt, 8.4 million people (66 per cent) continue to build up even more debt. While still paying off the original loan, five per cent of them took on another loan, 12 per cent went into their overdraft, 28 per cent racked up more debt on their credit card, and 21 per cent did a mixture of the above. Thirty per cent would consider consolidating again or are about to do so.

Tim Moss, head of loans and debt at moneysupermarket.com, said: “Debt has become the common curse of modern times. People need to be careful that the ease of getting credit doesn't catch them out. It can soon spiral into a debt sentence.

"Forty years ago, being in the red was a last resort. It seems many of today’s Brits are much more accustomed to taking on debt – although being able to control it is quite another thing."

Nearly a third (31 per cent) of consolidators feel trapped by debt or that it is spiralling out of control, whereas only 13 per cent felt it was a positive step. Consumer credit lending to individuals stands at £214 billion, with Britain's personal debt increasing by £1 million every four minutes.

The research shows consumer debt has become a necessary evil in many people’s lives. Just over a quarter (26 per cent) of consolidators say they will always be in the red, but they feel comfortable managing it.

Tim Moss added: "Taking a personal loan to consolidate debts can be a useful way to get your finances under control. But a loan for these purposes should be considered carefully and only regarded as a measure for becoming debt-free – not as a license to go spending again.

“It is in consumers’ best interests to realise the important implications of taking on debt and only consider a loan for a specific purchase, such as a car or as a last resort to manage their debt.

“With banks increasingly feeling the pressure of consumers defaulting on their credit arrangements, we can expect them to start tightening their lending criteria and pushing personal loan rates higher."