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IN DEBT? LIKE IT.. OR LUMP IT

Melanie Wright, sundaymirror.co.uk 20/01/2008

How to move what you owe into one low-rate loan

January is one of the most popular months for people to consolidate debts they're struggling to keep on top of into one lump sum... but watch out for potential pitfalls.

Do plenty of research before taking out a loan. Millions of people go for the first loan offered by their bank or building society, despite the fact there are often much cheaper deals available. Mike Naylor, at comparison website uSwitch.com, said: "The difference between the best and worst interest rates can be almost double, so choosing the wrong loan provider can be a costly mistake."

Our table (right) shows some of the current best buys. The good news is that rates are beginning to fall, so there are decent offers. Esther James at Moneyfacts.co.uk, said: "It is the season of debt consolidation, and five lenders - the AA, Alliance & Leicester, Barclays, Britannia and Moneyback Bank - have reduced rates, in some cases by as much as three per cent. Only time will tell if this is a limited marketing drive rather than the start of a more widespread trend."

When choosing a loan, remember that in 89 per cent of cases, the rates quoted are "typical". This means you might be offered a higher or lower rate than the one advertised, depending on your credit status. Check if rates are tiered or not. Esther James said: "Sometimes borrowing a little more could save you interest if the rate is substantially lower." When taking out a loan, watch out for a hard-sell on insurance. Known as payment protection insurance, it pays out if you can't repay the loan because you lose your job or are unable to work through sickness, but you can often get more comprehensive stand-alone cover for a fraction of the price offered by many lenders. Worryingly, research by claims handling company Portal Claims.com found one in 20 under-30s said they had been forced or bullied into taking out PPI with personal loans.

Almost half said they were under the mis-apprehension the policy they took was a condition of their loan, and 12 per cent were led to believe it would increase their chances of having a loan request approved. If you think you've been missold, download a letter to reclaim costs from www.which.co.uk/ppi.

Mike Naylor, of uSwitch.com, said: "The difference between the most competitive and most expensive cover can add £1,760 to a £5,000 loan over three years. By shopping with an independent provider such as payment care.co.uk, the cost could be slashed to £317. " Paymentcare.co.uk charge £3.95 per £100 of monthly cover, while British insurance.com's loan PPI cover starts at £2.65 per £100. If you are consolidating debts, don't continue to borrow on the credit you have moved the debts from.

Research by Moneysuper market.com found that of the 12.7million people who have taken out a loan to consolidate some or all of their borrowing, 8.4million continue to build up more debt.

Tim Moss, at Moneysupermarket.com, said: "Taking a personal loan to consolidate debts should only be regarded as a measure for becoming debt-free - not as a licence to go spending again."

BEST-BUY PERSONAL LOANS

Fixed monthly payment on £5,000 for 3 years

Apr Without insurance With insurance

MONEYBACK BANK