We are well into the new year, and the bills may be starting to bite. To relieve the pain some institutions are encouraging borrowers to bundle all their loans together into a "consolidation loan", which was once described by a cynic as "putting all your hard-to-pay loans into one impossible-to-pay loan".

A case can be made for this strategy because it enables you to enjoy an overall lower rate of interest but let's remember that lenders rarely come up with a new product just because they think it will be good for YOU. Usually their thinking is dictated by how it will benefit them ... in this case by increasing their market share.

Debt consolidation loans promise a lower rate, but there are traps.

Think about this scenario. The borrowers have a house loan of $350,000 at $1987 a month, a car loan of $25,000 at $635 a month, a personal loan of $20,000 at $425 a month and credit cards debts of $5000 requiring $200 a month. Total debt is $400,000 and overall payments are $3248 a month. If they borrowed $400,000 to consolidate all these debts into the housing loan the repayments should drop to $2270 a month, saving $978 a month - that's a whopping $225 a week.

While consolidation may be a useful strategy in some situations, you need to understand the principles involved in any borrowing. First, it is the height of financial irresponsibility to take out a loan with a term that exceeds the life of the asset purchased with the loan. This is why nobody in their right mind takes out a 30-year loan to buy a car.