Many borrowers who consolidate their credit-card and other personal debts could be tricking themselves into believing that their runaway loans are being brought under control.
Certainly, debt consolidation may work for some people as a means to rein in their debts, but for others it is like shifting the deck chairs around on the Titanic. Nothing really changes if a consumer keeps spending at the same frantic pace.
The ABS lending finance for figures February released this week show that the refinancing of personal debts is up by a breathtaking 54% on a year ago.
This great debt turnover is occurring as borrowers worried by official interest rates hitting a 12-year high try to hunt down a better deal while others consolidate their credit-card and other personal debts in an effort to bring their borrowing under control. CommSec economist Savanth Sebastian observes that personal debt consolidation was a key focus for borrowers early this year as debt pressures mounted.
The Australian Securities & Investments Commission (ASIC) argues that debt consolidation is next to useless unless borrowers use it to break their spending cycle. And if borrowers are not extremely careful, debt consolidation may lead to extra interest and other borrowing costs, and possibly turning unsecured debts into secured debts - perhaps using your home as security for the loan.
Caution is the core word with debt consolidation.
ASIC's personal finance website contains highly valuable advice about debt consolidation. As the regulator says: "Unless you use consolidation to break the cycle of spending, then consolidation will be a purely cosmetic, short-term operation." Read more at fido.gov.au
21st-April-2008 | 
