We are bombarded by TV adverts telling us that consolidation  loans are the answer to our financial problems. But this type of loan often comes at a high price.

An increasing number of people are moving all their debts to one lender. According to MoneyExpert.com around 6.5 million people have been forced to consolidate their debts in the past three years in a bid to keep borrowing under control. 1.29 million of them have moved debts of more than £20,000 run up on loans, credit cards, store cards and overdrafts to one lender. These people are most likely to be taking out loans secured against their property. MoneyExpert.com says it has seen an 85% per cent increase in homeowner loan applications in the quarter ending January 2008 compared to the quarter ending October 2007.

But warns John Hall, Chief Executive of newtomorrow.com, consolidation can prove to be very costly in the long run. “While television is full of adverts for consolidation loans promising to combine all your debt into one reduced monthly outgoing, it often comes at a price – high interest rates over many years with your home as security.”

He warns: “Consolidation loans might stave off the wolves for a while but it is unlikely to provide an acceptable long-term solution.”

Sean Gardner, Chief Executive of MoneyExpert.com agrees: “It is crucial that borrowers see consolidation as a wake-up call to get debts under control. It shouldn’t be something you keep on doing simply to tide you over from year to year.”

If you do decide to go down the loan road, it is imperative you use a legitimate, authorised source. “The provider should at least have a consumer credit licence and preferably be licensed by the Financial Services Authority. This rules out loan sharks - a highly risky and dangerous option,” says newtomorrow.com's John Hall.

But if possible Hall says an unsecured loan is the best option as it does not put your house at risk. He stresses: “Being fully informed of how much a loan will cost you in interest is important too because it can be confusing when different interest rates are given. Also, check to see if there are any early repayment penalties. Most loans can be paid off early with lump sum payments but this may sometimes incur an early settlement charge. With any loan, careful monitoring of when payments are due is essential to avoid unnecessary penalties – setting up a direct debit is the best way to avoid this happening.”