If you have racked up a lot of debt on credit cards, loans and overdrafts, then you may need a quick-fix solution. While debt consolidation can be the answer, it can also create more problems if you do not address your spending.

Consolidating your debts or refinancing – as the banks also like to call it – allows you to merge all your debts into one loan. So whether it is outstanding car or personal loans, maxed out credit cards or an overdraft, a bank will offer to merge these debts into one balance that you can then pay off with them.

It sounds like a dream solution to all your money woes as it means your debt is now in one place, which should enable lower, more manageable payments. Emirates NBD, for example, offers consolidation loans of up to AED800,000 for expatriates at a reducing rate of 6.66%. UAE Nationals can borrow up to AED3million at the same rate.

CBD  offers specific products to settle liabilities at a reducing rate of 6.50% for both expatriates and UAE Nationals.  The maximum loan amount for expatriates is AED700,000 and AED2million for UAE Nationals.

But while refinancing looks good on paper – it only helps those who will then adopt a sensible approach to their finances. There’s no doubt turning high-cost credit into low-cost debt is a good way to free up some cash for your everyday expenses but if you then spend that cash and run up even more debts you will end up in more trouble.

What’s the catch?

You need to ensure the deal you are getting on your new loan is really better than the situation you were in before. Yes, you might have lower, more manageable repayments but your new loan provider may extend the term you repay that debt over a longer period. So while it gives you more money in the short-term, you will pay much more in interest payments.

Also, check the rate. You need to ask the loan provider if it is a flat or reducing rate because there is a difference and personal loans can be advertised in both. While flat rates are usually lower – they might not be the most cost-effective option because they are calculated on the whole loan whereas a reducing rate is calculated on the outstanding balance so compare like for like.

The other big worry is the fees. There may be an upfront fee to pay or an administrative or ‘arrangement’ fee for processing the refinancing. This is typically 1%.  Some banks also charge early repayment fees – again often 1% – while others do not, so shop around for the best deal.

Finally remember that a debt consolidation deal is often just a marketing gimmick for a standard personal loan. Most personal loans – if you get approval – allow you to refinance existing debts anyway though some banks are stricter on this matter than others. Whatever your loan is called, just make sure you compare all the personal loans on the market and not just the consolidation offers to find the right deal for you. Then it is time to keep your spending in check.