Treat holiday debt hangovers with low rates

Many people will be bracing themselves for bills early in January and wondering how best to pay off the holiday debt. While some will choose to switch their debt to a 0 per cent balance transfer credit card deal or extend a low-cost overdraft, it could be worth considering an unsecured personal loan.

Many people will be bracing themselves for bills early in January and wondering how best to pay off the holiday debt. While some will choose to switch their debt to a 0 per cent balance transfer credit card deal or extend a low-cost overdraft, it could be worth considering an unsecured personal loan.

More than 300,000 of us applied for one in January 2004 - many to consolidate existing credit card, store card and overdraft debt, according to Moneysupermarket.com, a financial comparison website.

Fierce competition between online lenders, banks and supermarkets has driven interest rates down to as low as 5.8 per cent.

If you're struggling to manage credit card, store card and store credit debt with average interest rates of 14 per cent or above, say, a consolidation switch to a cheaper loan will reduce your monthly repayments.

New rules mean lenders can only advertise headline "typical" loan rates if at least two-thirds of applicants qualify. Be aware that a poor credit rating could mean you pay a higher rate.

Lenders such as Nationwide have a flat interest rate (6.7 per cent) instead - you're either approved or rejected.

Since many people often find that, after taking out a loan, they can afford to pay it off early, check for early repayment penalties.

Anna Sofat of independent financial adviser Destini Fiona Price recommends Northern Rock's internet deal with a typical 5.8 per cent rate. "It levies no penalties and is really competitive," she says.

Beware lenders who apply pressure to pay for payment protection insurance (PPI).

These policies are supposed to cover your repayments in the event of illness or job loss but many have critical exclusions and they are usually horribly expensive.

Check your employer's policy on sick pay to see if you can cover payments comfortably or see whether you have enough savings to tide you over instead.

A competitive loan to consolidate debt can help you better manage repayment, but don't assume that it will cut down on what you owe overall.

Personal loans spread out over periods as long as 10 years can end up being more expensive in the long run - especially with PPI added on.