Households are taking out more than one type of loan in a bid to keep up with rising costs, but it is taking longer to pay off debts. Individuals who have taken out multiple forms of credit are taking three and a half years to pay off their debts on average, according to new research.
Price comparison website Compare the Market found that the average household with more than one debt owes £7,296 on average, excluding mortgages, and 72 per cent are struggling to keep up with repayments. The most popular type is credit cards, with 86 per cent of those with multiple debts holding one. It is followed by personal loans (60 per cent), overdrafts (58 per cent) and store cards (36 per cent).
A quarter use payday loans, which are more popular among younger generations. Some 34 per cent of 18 to 24 year olds with multiple debt, and the same number of 25 to 34 year olds, are opting for this high-interest borrowing method. By comparison, just 13 per cent of 45 to 54 year olds with debt have payday loans, falling to 6 per cent for those over 55. Three-quarters of 18 to 24 year olds with debt have a credit card, making it the most popular option for this age group, but it is still below the national average.
The figure rises to 90 per cent for 45 to 54 year olds and 93 per cent for those aged over 55. There are some regional differences, too. The South East has the highest proportion of people who take out credit card debt (91 per cent), while Northern Ireland has the lowest (82 per cent).
Is a debt consolidation loan a good idea?
Repaying numerous debts simultaneously can be difficult, which is why some individuals opt for debt consolidation loans. A debt consolidation loan won’t reduce the amount you owe; instead, it can help you manage your debt more effectively, especially if you can get a loan at a lower interest rate. The money you borrow is used to pay off your existing debts, such as credit cards or overdrafts – leaving you with a single, larger loan with one monthly interest payment. Compare the Market’s research found that one in five people who have debt have not heard of them, despite the majority saying it would be easier to stay on top of debt if they were combined into one monthly payment.
However, you should consider all of your options for making your debt more affordable before you take out a consolidation loan. Your lenders may be able to offer you an affordable repayment plan on your existing loans. It is also possible that, if all of your debt is on credit cards, you could transfer all the debt to a new balance transfer card. This would mean you are paying the same interest rate on all of the borrowing, and you may also be able to get a card which has a limited interest-free period.
Again, it’s vital to check the interest rate, fees, and how long any interest-free period lasts to work out whether it will save you money. Speaking to a debt adviser at a charity like Citizen’s Advice or Stepchange before taking on another card or loan is also a good idea. Charlie Evans, money expert at Compare the Market, said: ‘It’s worrying that many are unaware of tools like debt consolidation loans, which could help to simplify their finances and potentially reduce their overall interest costs if the new rate is lower.’
Among those who have heard of debt consolidation loans, 41 per cent say they do not want to take on new debt, while 13 per cent say they can’t afford the upfront fees. ‘While debt consolidation loans are not the right solution for everyone, they can offer a valuable route to greater financial stability when used responsibly. Comparing loans offered by different providers online can be a helpful way of learning more about what’s on offer as well as for identifying the right deal for your specific circumstances.’
There are two types of debt consolidation loan: secured and unsecured. Secured loans can be easier to get, and have lower interest rates. However, they are only available to homeowners and are secured against their property, which they could lose if they don’t keep up repayments. It’s therefore crucial to ensure you can afford the payments if you opt for this type of borrowing.
Many high street lenders offer consolidation loans, but it’s essential to review the terms and conditions carefully. Some providers offer expedient deals, but they’re not as responsible or don’t offer a fair rate. If you feel pressured to sign up for a loan that is a cause for concern. Similarly, if the provider offers you a loan in cash or hasn’t provided any paperwork. It is worth taking the time to ensure your lender is regulated by checking if it is registered with the Financial Conduct Authority.
