Responsible Borrowing Starts Young

Why has ‘debt consolidation’ become such a common phrase nowadays? Unfortunately, the answer’s straightforward – it’s because debt has become a way of life for so many. It’s a sorry reality for even the youngest adults in our society, as illustrated in a recent publication from Rainer, the national charity for under-supported young people.nnPublished in May 2008, the report looks at credit, debt and other financial issues confronting today’s youngsters. It 'picks apart some of these challenges and, drawing on the direct experience of the young people facing them, sets out the action required to overcome them'.nnJoyce Moseley, Rainer’s Chief Executive, talks of the ‘often unavoidable route into debt’. On Rainer’s behalf, research and consulting organisation YouGov found that 90% of the young people questioned were in debt by the age of 21. One in five 18-24 year-olds had already found themselves more than £10,000 in debt. nnAs they start their adult lives, most young people find themselves with very little disposable income anyway, so once debt repayments start taking a ‘slice’, it’s all too easy for their finances to deteriorate rapidly. This goes a long way towards explaining the popularity of debt consolidation loans among young people.nnFor many young borrowers, the most important benefit of debt consolidation is simply a reduction of monthly outgoings. Replacing multiple debts with a single consolidation loan gives them a chance to arrange affordable repayment terms. This can mean the debt will take longer to pay off – and possibly cost more in the long run – but cost less each month.nnAt the same time, a consolidation loan may well come with a lower interest rate than the debts they’re paying off, especially if they’re high-interest debts from (for example) credit cards, store cards and overdrafts.nnConsolidating debt also makes it simpler to manage. Remembering one payment per month is much easier than remembering five. Lenders often issue penalty charges for late / missed payments, so a consolidation loan can actually help people keep their debts from growing.nnHowever, there are risks involved with debt consolidation. When someone pays off their debts (overdraft, credit / store cards, etc.), they have to be careful they don’t let these debts start growing again. In fact, it’s often a good idea to cancel cards and overdraft facilities, since it’s all too easy to borrow a bit here and a bit there until they’re in a worse situation than they were before they consolidated their debts – they’ll have to make payments to the consolidation loan every month as well as to the new debts they’ve run up!n