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Are there any 'catches' to debt consolidation?

Some financial experts have looked at this form of borrowing and raised some pretty serious concerns. They say that these financial products are based on what's called 'secured debt'. Secured loans are, some say, forms of lending as a last resort. They are an appropriate solution for about 3% of those who are heavily indebted, because for the majority of people with large borrowings, secured loans don't really solve their problems; they just extend them over a longer period.

In a classic example of financial 'smoke and mirrors', the word 'secure' in adverts for these products applies to the lender, not the borrower. What makes the loan secure for the lender is the fact that they take your house (or whatever else 'secures' the debt) if you can't repay. Analysts point out that the word 'unsecured' sounds riskier to the borrower, but in reality it isn't. The most competitive unsecured loans are usually offered at lower rates of interest than apply to secured debt. Real interest rates on these loans are often higher than advertised because the kind of borrower attracted by the advert often has a poor credit rating. Also, the rates of interest charged on these debts usually vary over time. Bank lending is usually fixed, so the borrower knows how much they'll have to repay each month.

Loans offer instant money - so tempting, but they can leave you with lasting problems! Copyright: John Gardiner, from stock.xchng.

Borrowing in the form of a secured loan also usually involves a long repayment period. The adverts often persuade people to borrow over 20, even 25 years. 'One low monthly payment' is possible because the loan is spread out over a very long time. The term of the loan, (the period over which it is repaid), disguises its true cost in interest payments.

Debt consolidation is also an area where companies offer payment insurance to borrowers. Again, analysts query the value of these financial products. They point to the highly profitable nature of these so-called 'Payment Protection Insurances' (PPIs). It seems that often the protection PPIs offer isn't valid for the full period of the loan. Finally, experts query the penalties applied to borrowers who want to repay their debt early. Although there is now a maximum permissible penalty (2 months worth of interest), this rule apparently doesn't apply to loans over £25 000.

In the face of such a number of 'catches', you'd expect the debt consolidation business to have come under scrutiny. The industry behind personal lending receives considerable media coverage. There have been enquiries led by the Competition Commission into home credit schemes - where small loans are given, with repayment made weekly or fortnightly from the customer's home. We have also seen the signing of a Parliamentary 'Early Day Motion' asking for greater control of debt consolidators. The use of 'celebrities' to front adverts on TV for these loans has also been attacked in some quarters.

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