The consolidation clock is ticking

Consumers could save £15 billion in interest by consolidating all their unsecured debts (credit cards, overdrafts and unsecured loans) into one low cost unsecured personal loan, according to research from uSwitch.com.

With total UK personal debt currently standing at £1.39 trillion and £93 billion being spent in interest each year - every penny really does count. The average household could save £605 in three years by consolidating to a best buy loan and making just one fixed payment every month. This could mean the difference between getting by or, for those teetering on the edge, being pushed into insolvency.

uSwitch.com analysis shows that 9.5 million people in the UK have already maxed out at least one form of credit over the last six months. With £222 billion owed on credit cards and unsecured loans, and each UK household owing a total average of £4,280, almost one in four adults (23%) are finding their current level of debt unmanageable.

However, there is growing evidence that the era of easy credit could soon be a thing of the past and some providers are no longer lending to people with a less than perfect credit history. More than one in three people (38%) who applied for a new credit card in the last three months were declined and 19% have been rejected for an unsecured loans. Worryingly, 6% of people have also had their existing credit card limit cut. This will start to impact on borrowers wishing to consolidate - in 2006, more than a third (35%) of UK adults consolidated their debts into a low cost loan in a bid to reduce their monthly credit repayments.

Mike Naylor, Personal Finance Expert at uSwitch.com comments: “People have enjoyed easy access to cheap credit for quite some time, but for some, the party really could be over. Anyone with multiple debts and a poor credit history could be vulnerable to the impact of the credit crunch and should seriously consider consolidation while the option is still available. The base rate reduction is a step in the right direction, but it could be too little too late for people in real financial difficulties.”

The average household pays around £3,744 in interest each year (on all borrowing including mortgages) which is £517 more than last year. The latest figures from Citizen’s Advice reveal that they currently help more than 6,600 people a day across the UK with debt problems. This represents a 25% increase on 2006 and indicates that debt problems for UK consumers could be getting out of control.

Debt consolidation can have pitfalls for consumers with little financial discipline. Out of those that consolidated their borrowing in 2006, 65% did not close down existing forms of credit and as a result ended up racking up an additional £2,300 of debt which completely negates the whole process. Consumers have to take responsibility for closing down existing forms of credit as 9 out of 10 people were not asked by their lender if they would be paying off their existing debt. There is also the problem of consumers that borrow more than they need to when they consolidate debts citing reasons such as a ‘rainy day’ (43%) or just the need to ‘treat themselves’ (27%).

Consolidation pays: the average household debt of £4,280, including £1,204 on a credit card, £2,683 on a loan and £393 on an overdraft could end up paying £1,060 in interest alone over 36 months. Consolidating these debts to a best buy unsecured loan (such as Barclaycard 6.8% APR) would save someone £605 over three years.

Mike Naylor concludes: “With banks tightening their lending belts more every day, people need to keep a close eye on borrowing costs and monthly interest payments because every penny counts. An unsecured loan with a fixed monthly payment and a fixed interest rate may be a safer bet in this climate, but consolidation must be done properly. Consumers must make sure they close down other existing forms of credit to avoid the temptation to rack up these debts again - otherwise any saving will be wiped out. If consumers don’t act now to sort out their finances, they could find themselves caught in a spiral of debt with no way out.”