With credit conditions tight and unsecured loan rates escalating, more Brits than ever before are turning to consolidation loans to keep their debts under control. But is consolidating really the best way to deal with your finances? We explore the pros and cons.

According to latest research, 14% of people in the UK have had no choice but to consolidate their debts, with 6.5 million people taking the plunge in the last three years.

There’s also been a steep rise in consolidated debts over £20,000, and an astonishing 85% increase of 85 percent in applications for homeowner loans since October 2007, MoneyExpert.com revealed recently.

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It makes sense to roll up all your debts into one manageable payment, but it may not be the best option for you. For example, you could try paying off debts with the highest interest rates first while making minimum payments on other loans instead. Read our handy pros and cons to decide whether consolidation really is the best payment plan to manage your debts.

Consolidation Pros: Why Consolidation Loans Are a Good Idea

• Consolidating makes everything simpler, so you can see exactly how much you owe and how much you’re paying each month. “Debt consolidation is entirely sensible and a good way to get your finances under control if you owe money to different lenders at varying rates of interest. Anyone who is juggling a range of debts with money owed on credit cards, store cards and loans should be acting to get their debts under control,” says Sean Gardner, Chief Executive of MoneyExpert.com. David Kuo, Head of Personal Finance at Fool.co.uk, agrees. “It can make sense to roll up several expensive debts into one affordable monthly payment if you are faced with a myriad of claims on your money,” he says.

• Consolidating really could save you a significant amount of money. “Consolidating your debts into one personal loan which charges a lower rate of interest can mean that you could save hundreds of pounds in repayments,” says Steven Baillie, loans manager at Sainsbury’s Bank. The average household could save £605 in three years by consolidating and making just one fixed payment every month, and you could save much more than that if your debts are greater than the average of £4000, according to uSwitch.com.

• You’ll have far more control over your money. If you think there’s a chance you’ll be able to make overpayments and pay off your loan early, you can choose a flexible loan, or to avoid interest rate rises you could take out a fixed rate loan.

Consolidation Cons: Why You Should Think Twice Before Consolidating

• Your new monthly loan repayments could be higher than you can cope with. “Although these loans are tempting because you can roll all your debts into one monthly payment, often the monthly amount is higher than what most people can really afford – which leads them back to taking on new forms of debt before long,” says Tom Butler-Bowdon, author of personal finance book 50 Prosperity Classics. “It may be better to deal with your existing debts separately, speaking to your creditors and working out how much you can realistically afford to pay back each month, leaving enough money for all your normal living expenses.”

• Consolidation won’t magically improve your spending habits, so if you don’t consciously increase your financial discipline you could end up with even more debts. “It only works if you accept consolidation is a wake-up call to get your borrowing under control and then work to become debt-free,” explains Sean Gardner, Chief Executive of MoneyExpert.com. “Many people simply see consolidation as a way of keeping on borrowing.” And it shows – three out of five borrowers who consolidate then go on to run up further debts, according to findings by Fool.co.uk.

• It’s often very tempting not to close down your existing forms of credit – in fact, a massive 65% of people who consolidated in 2006 failed to do so and as a result ended up racking up an additional £2,300 of debt, according to figures from uSwitch.com. “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,” explains Mike Naylor, Personal Finance Expert at uSwitch.com. Lisa Taylor, analyst at Moneyfacts.co.uk, agrees. “The golden rule for any form of debt consolidation is to cancel, close and cut up your existing forms of credit,” she says. “Keeping existing credit cards and overdraft limits can prove to be too big a temptation, and a few months down the line you could be back to square one.”

• It can be very difficult not to use your credit cards until you’ve cleared all of your debt. “Those newly paid-off credit cards will be brought back to life with enticing and generous spending limits. It can be difficult to resist whipping them out to reward yourself, especially if you have been diligently paying off your consolidation loan month after month,” says David Kuo, Head of Personal Finance at Fool.co.uk. “Consolidation loans can be a welcome lifeline for people caught in financial difficulties. But the lifeline can quickly turn into a noose if you submit to the temptation of running up further debts.”

• The option of borrowing more than you need is easy and tempting, but will only increase your debt and worsen the problem in the long run.

• Not all consolidation loans are created equal, so like any other financial product it’s best to shop around to prevent unforeseen problems. “Around half the loans taken out by people in our survey carry a penalty for early settlement,” warned David Kuo, Head of Personal Finance at Fool.co.uk. “This is unreasonable, and is unlikely to encourage borrowers to pay off their loans sooner.”

• It’s easiest and tempting to get a secured consolidation loan against your home, but unless it’s the only option it’s best to avoid that risk.

What to Look For When Choosing a Loan: It may be easier to simply accept the first loan you see, but sticking with your current bank and failing to shop around could cost you – big time! To find out how to get the best deal for you, Click Here.