Warning over spiralling borrowing

The credit crunch means loans are more difficult to come by

A quarter of people taking out a loan to consolidate their debts go on to borrow more, according to a survey.

Some 26% of those who do not close existing debts when consolidating borrow a further £2,221 on average, said price comparison website Uswitch.

It said that 1.3 million such loans were issued in 2007 to people aiming to manage all their debt in one package.

It called on lenders to issue more warnings about the dangers of failing to pay off other debts.

New code

The YouGov poll of 4,048 people suggested that 23% of people taking out a consolidation loan failed to close down their existing debts.

Some 85% were not asked by the lender about closing other debts, it added.

Mike Naylor, personal finance expert at Uswitch, said lenders should be more careful especially as the credit crunch hits and borrowers miss repayments.

"The potential profits have clearly been too good to resist," he said.

The new voluntary Banking Code, which came into force this week, says that banks must do more to help customers facing financial difficulties.

Controversial loans

Consolidation loans have proved controversial, with some experts claiming that many actually push households further into debt.

They are attractive as borrowers feel it is easier to keep on course paying back a single debt, rather than lots of smaller ones to a variety of lenders.

Chancellor Alistair Darling said last year that he was keen to look into the claims made in daytime television commercials advertising these deals.