When multiple personal debts become overwhelming, a debt consolidation loan appears to provide the answer. Credit card debt, overdrafts, hire purchase agreements and small loans can all be combined and a single, affordable monthly repayment made. However, this may not necessarily be the case.
Why a Debt Solution Could Be Better than a Debt Consolidation Loan
- When a consumer consolidates debt, cards and overdrafts are left active and are used again.
- Turning unsecured into secured debt provides a creditor with collateral.
- The repayment period is extended which means more interest is paid over the loans duration.
- Additional money is borrowed.
- Home equity is utilised and this can make refinancing or moving home more difficult.
- Missed or late payments may mean that a higher rate of APR is charged.
What Debt Solutions Are Available?
Should someone with personal debts have missed or made late payments on an existing or past credit agreement, these will show on a credit report for a period of six years. This not only makes borrowing more difficult, it makes it more expensive. A debt solution, such as a Debt Relief Order (DRO) or Debt Management Plan (DMP) are helpful for negotiating modest levels of debt up to £15,000. An Individual Voluntary Arrangement (IVA) or choosing to declare bankruptcy may be the answer to serious debts.
Debt Management Plans
When a consumer has bad credit, a debt consolidation loan will prove expensive. A Debt Management Plan (DMP) is a debt solution that allows someone to manage personal debts without borrowing any additional money. It is an informal agreement with creditors to make a monthly repayment to an intermediary who will distribute this to creditors. It is often possible to freeze interest and further charges.
Debt Relief Order (DRO)
Rather than choosing to consolidate debt, a Debt Relief Order (DRO) seeks to free a consumer from financial difficulties. It is a debt solution that allows someone to write-off up to £15,000 of personal debt. In order to be eligible, a consumer must have a disposable income of under £50 and assets of less than £300. An intermediary, a qualified debt counselor will help wit general advice and paperwork.
Individual Voluntary Arrangement (IVA)
Homeowners traditionally have the option of taking out a debt consolidation loan or an Individual Voluntary Arrangement (IVA) when personal debts are greater than £15,000. An IVA is not a loan or a way to consolidate debt, it is a debt solution that can write-off up to 75% of all money owed. Once 60 pre-agreed monthly payments have been made and any remaining liabilities are written-off. Creditors will vote on whether to accept an IVA; 75%, in terms of value, must vote in its favour.
The majority of consumers who choose to declare bankruptcy cannot get a debt consolidation loan due to a bad credit history. Whilst homeowners tend to consolidate debt or opt for an Individual Voluntary Arrangement, filing for bankruptcy helps those who have no assets to protect. It is possible to write-off debt and be fully discharged in just 12 months. The insolvency will result in the loss of any valuable assets, can affect professional status and it will be made public in a local newspaper.
A debt consolidation loan is useful for homeowners with a good record of prompt payments. However, those who do have a bad credit history are likely to find that the only way they can consolidate debt is through a secured loan. Turning unsecured into secured debt is rarely a good option when a debt solution, such as a Debt Management Plan or Individual Voluntary Arrangement, could help someone overcome financial difficulties without the need for further borrowing.