New research reveals that the proportion of consumers taking out a personal loan to consolidate their debts is falling, with loans for home improvements and cars growing in popularity.
The sharp decline in debt consolidation loans suggests that many borrowers are paying off their existing debts, rather than moving them around, according to the new research from Sainsbury’s Finance.
Debt consolidation falls in popularity
In 2007, one pound in every 13 taken out by Sainsbury’s Finance’s personal loans customers was solely for debt consolidation purposes. In 2008 this dropped to one pound in every 19, and in 2009 this fell to one pound in every 50.
By contrast, large purchases such as home improvements and cars are becoming much more common reasons for people to take out a personal loan.
The supermarket bank says that a decline in debt consolidation may be an indication that the difficult economic climate has led debt-conscious consumers to try and pay off their debts, an analysis that backs up Bank of England statistics which show that for five consecutive months in the latter half of 2009, repayments outstripped new unsecured consumer credit.
Debt consolidation an option for those with multiple debts
Steven Baillie, Head of Loans at Sainsbury’s Finance, said: ‘Debt consolidation has always been one of the most common reasons for people to take out personal loans, but while more and more people are taking out a loan for other reasons, there has been a sharp decline in the proportion of people borrowing money in order to consolidate their debts.
‘However, for those with multiple debts, consolidation is still one way to reduce their monthly outgoings as long as they look around for the best rates on the market, which could save them a considerable amount in repayments.’
If you’re struggling with debt, take independent advice
Martyn Saville, Which? principal researcher, commented: ‘Given the economic uncertainty of the past two years, it’s unsurprising that many consumers have concentrated on repaying existing debt, rather than take out consolidation loans. As consumer confidence returns to the market, it’s likely that the trend towards loans being used for home improvements and cars may well continue.
‘I’d encourage anyone thinking about debt consolidation to think carefully before signing on the dotted line. While switching existing credit card, loan and overdraft balances to a new low-rate personal loan could cut the interest you pay, this only works if you keep up the repayments and avoid running up new debt on the credit card and overdraft you’ve just cleared. If you’re struggling with debt, it’s worth taking advice from a free and independent debt advice organisation such as Citizens Advice, the Consumer Credit Counselling Service or National Debtline. More information, together with contact details, can be found in the expert Which? guide Dealing with debt.’
To find out whether a personal loan is the best option for you, read our guide to your loan options. And to compare Sainsbury’s Finance loans with other providers’ loans, check out Which? Best Rate personal loans.
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