Getting into debt is easy. It is the getting out of debt that proves the toughest test for people. Whether you have spent too much on the smaller things or had to part with money due to a medical or family emergency, the bottom line is that there is no difference. But, where do you go for help?
There are a number of measures out there that can help you regain control of your finances, as well as your debt. The two options that this article is going to look at are an IVA and Debt Consolidation.
These approaches are very different, yet yield the same result. They will both help you get out of debt in a sustainable way. However, choosing the right solution can prove difficult. This article will give you the information you need on each debt solution, as well as comparing the two. This way, you will know which product is right for you.
What is Debt Consolidation?
Debt consolidation is not a difficult debt solution to get your head around. It involves taking out one loan to repay other existing credit agreements.
There are two types of debt consolidation that you should be aware of. The first is an unsecured debt consolidation loan, whilst the other is a secured debt consolidation loan. These two types of debt consolidation loan are very different. The main difference being that a secured debt consolidation loan is secured against an asset, usually your home. This acts as leverage in your application, but also means that your home could be at risk of repossession if you fail to repay your debt consolidation loan.
Depending on the debt consolidation loan provider, you may be able to get help reducing your existing levels of debt. Some debt consolidation loan lenders may work on your behalf when using the loan to repay your existing debts. This works very much like an IVA, which shall be covered a little later. This only occurs with a few select debt consolidation loan providers, and it is not the industry norm.
Debt consolidation loans can also be very niche. They can be aimed at credit cards or household bills, especially if these have spiralled out of control. You may be able to pick up these more specialist credit card consolidation loans or a specific bill consolidation loan from certain lenders.
Ultimately, the theory of a debt consolidation loan is to allow you to group your existing debts together.
Grouping your existing debt in this way makes debt a lot easier to manage. You are managing one debt, as opposed to several debt payments each month. A debt consolidation loan can also reduce the payments that you make by compounding the interest rate levels. For example, if you have three different types of debt, with three interest rates of 10 percent, 15 percent and 20 percent, a larger debt consolidation loan may be available for 12 percent. This could save you a lot of money in the long term.
What Is An IVA?
An IVA, or Individual Voluntary Arrangement, is a debt agreement set up between yourself and your creditors. This is where you are expected to pay a set amount of money, over a certain period, back to your creditors to pay back your debt and what you have borrowed. It really is that straightforward.
IVAs are set up by specialists called Insolvency Practitioners (IP). Whilst setting up an IVA you must be completely open and honest about your debt, which creditors your debt is with, your income and your expenditure. Being as honest and transparent as you can will put you in good stead for a number of reasons.
An IVA aims to help you settle your unsecured debt with your creditors within a reasonable timeframe. Whilst you have to repay your debt, there are a few little perks you will receive by choosing an IVA. One of which is that all of the interest and charges on your debt is frozen at zero percent. Another great perk is that your creditors are not allowed to contact you once you have an established IVA set up. So, they cannot get in-touch with you to ask for any more money or harass you with other threatening behaviour.
Your monthly payments are worked out in a very fair way too. They are simple based on what you can afford. This is achieved by noting your income and expenditure. This may sound normal, but an IVA goes an extra mile by including your ‘living’ expenses within your expenditure. So, what you pay into an IVA at the end of each month is only what you can afford.
Some debts also have the potential to be reduced. An IP will work on your behalf to contact your creditors, to advise them that you are entering an IVA and so that they can reach a settlement on your debt. Interest and charges will be frozen, and you could receive a reduction in the amount of debt that you owe.
People who take out an IVA will not be able to access any further credit for the duration of the IVA. This forms part of any IVA agreement. Most IVA agreements are taken out over a five year period, so before you go signing on the dotted line you will need to make a decision on whether you can go without extra credit for five years.
What’s best for you?
This is the million dollar question. Do you opt for a debt consolidation loan or do you go for the IVA?
The right answer will be dependant on your own circumstances. You will need to assess the levels of debt you are currently in, as well as how many creditors you owe. You will also need to make a decision on whether you can go a whole five years without accessing any additional credit. No one knows what the future may bring, so it could be a big risk.
Both solutions work in helping clearing and paying back existing debt. Never pick the easiest option, instead opt for the option which is right for you.
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