A Comparison Of Uk Debt Solutions

If you are looking to clear your debts, there are a number of debt solutions that may be able to help. Each one is designed to aid people in different situations and with different levels of debt.

Here is an introduction to three of the debt solutions available to people in the UK: debt consolidation, debt management and IVAs (Individual Voluntary Arrangements).

Debt consolidation loan
A debt consolidation loan is a new loan that enables you to pay off your existing debts in full, effectively 'consolidating' multiple debts into one convenient monthly payment.

As well as making your debt a lot simpler to manage, a debt consolidation loan can also allow you to reduce your monthly outgoings by spreading your repayments over a longer period of time. This can be a big help to people who want to free up some cash on a monthly basis, but be aware that because the repayment period is longer, you will also be paying interest for longer, and this may mean you will pay more overall.

That said, if you consolidate high-interest debts - such as credit cards - you may still end up paying less interest than if you had kept on with your original terms, so long as your new interest rate is sufficiently low.

Things to consider
A debt consolidation loan is still a debt - so you must be completely confident that you can keep up with your new repayment terms. So, for example, if you do not earn a steady monthly income, a debt consolidation loan is unlikely to be the right debt solution for you.

Debt Management Plan
A debt management plan is an informal arrangement with your creditors in which you will agree to repay your debts at a slower, manageable pace. It may be a suitable debt solution for people who can no longer keep up with their existing repayment terms, but feel they would be able to repay their debts if they could do it over a longer period of time.

As well as reducing your outgoings, it's often possible to reduce or freeze interest and other charges, which can prevent your debt from growing.

It's possible to make these arrangements on your own, but since this can be time-consuming and stressful, you may wish to arrange your plan through a professional debt management company, which can negotiate with your creditors on your behalf.

Things to consider
First of all, repaying any debt more slowly may increase the overall cost, as it'll be accruing interest for longer.

Your lenders are under no obligation to accept the terms of a debt management plan, and since it is an informal arrangement, they can change their minds at any point.

Also, the fact that you will have effectively defaulted on your original repayment terms will be recorded on your credit history, and this could affect your ability to obtain credit in the future.

IVA
An IVA (Individual Voluntary Arrangement) is a legally binding agreement that can allow you to avoid bankruptcy by repaying an agreed percentage of your debts, and writing off the rest.

On an IVA, you will make regular monthly payments to your Insolvency Practice, which will distribute the agreed amounts of money amongst your creditors. This usually continues for five years, and providing you keep to the terms of the agreement for the whole period, your remaining debt will be written off on completion.

Things to consider
An IVA is a serious financial commitment that will require you to give up most of your surplus income (i.e. the money you don't need for essential commitments, such as mortgage/rent and household bills) to put towards your debts. If you are unsure whether you will be able commit to regular monthly payments, then you may want to consider another option, such as bankruptcy.

As a form of insolvency, an IVA will severely affect your credit rating. The IVA will be recorded on your credit history for six years after it starts, so you may experience difficulty in obtaining further credit for a year after your IVA has finished.

While your IVA is ongoing, you may be required to give up some of any increase in earnings (including salary rises and bonuses) to put towards your debts. And if you're a homeowner, you may be expected to release some of the equity in your home in the 54th month of the IVA (half way through the final year).