When personal debts start to get out of hand, the first reaction is often to consolidate with a loan. However in many instances, borrowing more money can make the situation worse.

Debt consolidation is the practice of using one loan to pay off multiple smaller debts such as credit cards, store cards and bank overdrafts.

A consolidation loan can be obtained in a number of different ways. A personal loan from a bank, a loan secured against a property or even the remortgage of a property to release equity.

Paying off debt with a consolidation loan offers a number of advantages. However there are also some considerable pitfalls to be aware of before borrowing more money to try and get out of debt.

What are the benefits of taking a consolidation loan?

The interest charged on a consolidation loan is often lower than that charged on debts such as credit cards and bank overdrafts. The debt is therefore cheaper to pay back overall.

Recent reports have shown that the interest rates being charged on authorised overdraft facilities can be as high as 19 per cent. As such, consolidating this debt with a loan charging between 8-10 per cent makes a lot of sense.

The monthly repayments are also often lower than the combined payments of the accounts that have been consolidated. This is particularly the case with secured loans or mortgages where the amount is borrowed over a 10-20 year period.

Lower monthly payment amounts can be a significant benefit if you are working to a tight monthly budget.

Many people also find that a single consolidated loan payment is far easier to manage than multiple payments to different accounts which may fall at different times during the month.

Could consolidation make a debt problem worse?

Despite the advantages of consolidation, if you are struggling with your debt repayments, a consolidation loan will only help you get out of debt if you follow some simple rules.

1. Make sure you can afford the loan payments – The monthly repayment amount for a consolidation loan may be less than the combined amount you pay back to your current debts each month. If you are desperate to find a way to reduce your monthly expenses, consolidation can therefore seem like a lifeline.

However, before taking the loan, you must carry out an income and expenditure analysis to ensure you can afford to repay even the reduced overall payment amount that it offers.

If this is not the case, you will continue to supplement your income by using your bank overdraft or credit card and your debts will slowly continue to increase.

2. Consolidate all of your debts – Make sure you borrow enough money to pay off all of your outstanding debts.

If you are unable to repay everything, you will still have to continue to pay some of your older debts each month. This will then significantly reduce the benefit of the single lower payment that a consolidation loan should provide.

3. Change your spending habits – This is arguably the most important rule of consolidation. The reason why debt builds up in the first place is often because you are living beyond your means.

If you continue to live outside your budget, you will start to use your credit card and store card accounts again. Before long you may find that you are back in a situation where you are struggling to make your payments once more.

However, this time your debts are that much greater because you also have a consolidation loan to repay.

In certain circumstances, dealing with debt using a consolidation loan can work extremely well. However if not properly thought through and managed, consolidation can make the problem significantly worse.

As such, before borrowing more money you should speak to a personal debt expert and consider all of the debt management solutions available.