Debt consolidation – how it works

Debt consolidation loan

Debt consolidation is a method by which you take out one larger loan to repay your other outstanding loans and debts. It is best to get a lower interest loan.

A debt consolidation loan should reduce your monthly payments and replace a number of repayments with one single payment. This can make good sense and can improve your financial situation and reduce stress. 

There are various sources of finance in order to do this including banks, other financial institutions and possibly friends or family members. We would certainly suggest exercising caution when borrowing from friends or family.

I am struggling with my finances – is debt consolidation my best option?

If you find yourself in financial difficulty which is why you’re looking at a debt consolidation loan it may be that your credit score has already been affected. It is possible that lenders will only be willing to lend you additional money secured against any assets you may have and at higher interest rates.  So you could be swapping unsecured debt for secured debt.  Be careful to avoid taking out a long-term loan to replace short-term loans since your total interest and capital repayments are likely to be substantially higher.

In this case, debt consolidation may not be your best option and you should consider looking at alternative forms of debt relief.

Should you consider an IVA?

An individual voluntary arrangement is a legal agreement between you and your creditors to help you get relief from your debt. Your debt and interest payments are frozen and you make one affordable fixed monthly payment for the duration of your IVA, which is typically five years. At the end of your IVA, the remaining debts are written off. An IVA can only be put in place by an insolvency practitioner.

You are legally protected from your creditors

An IVA protects your assets. You are offered full legal protection from your creditors and you no longer have to deal with them. This alone can really reduce the stress you are feeling in this difficult situation.

When you enter into your IVA a note is placed in your credit file that should prevent you from creating additional debt during the duration of your IVA.  

An IVA is a powerful and effective way to give yourself time to repay the debt at a level that you can afford and to wipe the remaining debt at the end and reduce stress levels.

In conclusion, a debt consolidation loan could be a very good solution provided you can get it at a lower interest rate and preferably unsecured. If you find yourself struggling with your debt then you would be well advised to consider other debt relief solutions such as a debt relief order, a debt management plan or an IVA.

This Government webpage has some good further reading to better understand options.

Learn more about IVA’s or use the Your IVA Checker to discover if an IVA is the right debt relief solution for you.

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