Debt Consolidation – What is it?

Well Debt Consolidation is the process of amalgamating debts such as bank loans, credit cards, store cards and other loans into one repayment vehicle. This may has a result reduce your monthly outgoings and make management of the debts easier.

There are a number of mechanisms or repayment vehicles which can be used to achieve Debt Consolidation. The most straightforward one is a Debt Consolidation Loan. A Debt Consolidation Loan is a loan taken out to repay other others. In order to reduce monthly repayments the loan typically has to consist of a great repayment term than existing dates.

Debt Consolidation Loans can be unsecured or secured loans it will often depend on your personal circumstances, the amount you wish to borrow and the term of the loan.

Another way to achieve Debt Consolidation is an Individual Voluntary Arrangement (IVA). IVA’s were introduced by the Insolvency Act of 1986 and was set up as an alternative mechanism to Bankruptcy.

An IVA is an arrangement entered into between a borrower and creditors in which the interest is frozen and a repayment schedule is agreed. Unlike other forms Debt Management, an IVA is a legally binding agreement and is supervised by a Licensed Insolvency Practitioner.

An IVA should only be considered if borrowers are in extreme difficulties. An IVA is often regarded as a more favorable option than Bankruptcy for both the borrower and the creditors as it provides the creditors with a realistic repayment agreement.

There are other types of Debt Management which can achieve some of the benefits of Debt Consolidation but these can often mean approaching creditors directly to restructure debts. Some creditors may agree and others may not. Creditor harassment can often deter people from these types of Debt Management.

Debt Consolidation, what are the things to watch out for?

One of the things to watch out for with a Debt Consolidation Loan is the loan term and the effect this has on the total amount of interest. The temptation is to extend the loan as long as possible and hence achieving the lowest monthly repayment. However, the longer the term the more interest you are likely to pay.

Always read the terms and conditions of any loan agreement. Ensure that any fees associated with the loan are fully explained, reasonable and necessary. You should watch out for redemption penalties. If you want to repay the loan early are there any fees in repaying the loan early.

Often loans are sold with insurance protection. This insurance can often protect you against Accident, Sickness and Unemployment. Whilst this type if insurance is highly recommended, you should ensure that the cover is suitable for your personal circumstances so if you have to make a claim you are covered.

If you are considering entering into any other Debt Management vehicle such as an IVA you should you should seek independent and professional advice from your local citizens advice bureau, a solicitor or an accountant.

The content, advice and any recommendations given on this page or any page of our website is given without legal responsibility. For specific advice about your own personal circumstances you should seek independent advice for example from your local citizens advice bureau, a solicitor or an accountant.

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