Will an 'umbrella' loan cover all my debts?

Q There is a lot of advertising for "umbrella" loans around. If I want to pay off debts from a number of different borrowers, are they a good thing or is there a catch?

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A Consolidation, or "umbrella" loans, as you call them, are everywhere at the moment - you can hardly turn on the TV or radio or open a newspaper or magazine without being confronted by a friendly smiling face offering to relieve you of your debts.

And it all seems so simple. If you have debts from several sources with repayments going out at different times during the month, it can be difficult to keep track of everything. It's also true that a single bigger loan covering all your debts may be available for a lower interest rate than all the combined rates currently being paid.

But be very wary. A consolidation loan will pay off all your debts and provide you with a single, more manageable monthly payment, but because the repayment is smaller it will take you longer to clear the loan. And that means you will pay far more in interest, in the long run, than if you stick with your original loans.

The other problem with consolidation loans is that many people taking them out don't alter their financial situation to suit - in other words they continue to spend and borrow in the manner which got them into debt in the first place.

So all they're doing is replacing several small debts with one larger one, and then running up lots of small debts again.

If you have the strength to change your spending habits, cut up your credit cards and face mounting debts, consolidation can be useful. But remember that you will still be in debt - albeit to a single creditor rather than several - and it will take you longer to clear that debt.