Debt consolidation is defined as a process in which a consumer takes out a credit agreement, in the form of a fixed period loan or revolving credit (such as a credit card or flexible loan), and uses some or all of the funds advanced to pay off two or more existing debts, in full or in part. Debt consolidation is one possible purpose for obtaining credit rather than a specific type of credit, although some kinds of credit are more suited to the purpose of debt consolidation than others.

What kinds of credit agreement can be used for debt consolidation?

All credit agreements that are not linked to a particular purchase could be used in whole or in part for the purposes of debt consolidation. There are, therefore, a wide range of products that could, in principle, be used for debt consolidation including:

• an unsecured loan
• an advance from an existing mortgage provider secured against property but leaving the original mortgage intact
• a second charge mortgage (a loan secured on property, from a lender other than the existing mortgage provider, that leaves the first charge mortgage in place)
• a remortgage (which will replace any pre-existing first charge mortgage); and the transfer of balances to a credit card (including the use of credit card
  cheques to pay off non-credit card debts).

In order to assess accurately what proportion of loans and credit agreements are used for debt consolidation it would be necessary to observe the use to which the money advanced is put. Some lenders make direct payments to existing creditors when the new credit is agreed, a practice which would identify a loan as for the purpose of debt consolidation. However, many lenders simply advance money to the borrower who is then able to use it as they wish. Some lenders ask for, and record, the reason for which the loan is being made, others do not. However, even where a reason has been given, it may be difficult to identify accurately all of the credit agreements taken out for the purpose of debt consolidation. A consumer may have more than one reason for taking out an agreement (for example, to consolidate debts and to have a holiday), not all of which may be stated or recorded. Even when the reason for taking out a credit agreement has been supplied it may not reflect accurately the borrower's motives. In addition, consumers may think that saying that the loan is for debt consolidation will be regarded as a negative signal, or they may be embarrassed to admit to being in financial difficulty. They may, therefore, report the reason for the loan incorrectly.

In order to make an estimate of value and volume we decided that an agreement should be considered to be for the purpose of debt consolidation when one or more of the following applies:

• the agreement provides for direct payments to existing creditors by the lender
• the borrower has stated that one purpose of the loan is consolidation or repayment of existing debts
• the advice or marketing of the lender or the intermediary identifies the loan or agreement as a potential means to consolidate or repay existing debts.