5 ways to pay off debt without a loan

21 September2009

There are many ways of paying off or clearing your debts - some of which involve taking out further credit, and others which don`t.

Of course, not everyone in debt is comfortable with taking out extra credit. With that in mind, here are five ways you can improve your chances of clearing your debts without taking out a loan.

1. Cut back on non-essentials

In some cases, you may be able to improve your ability to repay your debts simply by cutting back in certain areas.

What you might consider `little luxuries` could be really adding up over the course of a month. Think about how much you`re spending on things like coffee and snacks every day, for example. These might only cost you a small amount each day, but how much are you spending overall each month?

Cutting back in more expensive areas, such as meals out, takeaways, TV subscriptions, etc. could make an even bigger difference to your finances.

It isn`t easy cutting back on all luxuries - but by cutting back in just a few areas, you could greatly improve your ability to repay your debts.

2. Debt Management Plan

If you have tried to cut back but still find that your debt repayments are unaffordable, a debt management plan could help.

A debt management plan is an informal agreement with your lenders in which you ask them to allow you to make smaller payments towards your debts over a longer period of time. This ensures your full debt is repaid over time, but at a manageable pace.

It may also be possible to negotiate a freeze or reduction in interest and other charges, which can prevent your debt from getting any bigger while you`re clearing it.

A debt management plan can be arranged by you on your own, or through a professional debt management company. Depending on which debt management organisation you talk to, they may negotiate with your lenders on your behalf, and take care of all communication between you and your lenders for the duration of the debt management plan.

Be aware that because you will not be sticking to the original repayment terms on your debts, a debt management plan will have an impact on your credit rating, which can make borrowing money more difficult and/or more expensive during the six years it stays on your credit report.

3. IVA (Individual Voluntary Arrangement)

If you cannot see any way of paying back your debts within a realistic time, an IVA may be the right debt solution for you.

An IVA is a legally-binding agreement with your lenders in which you`ll agree to repay a set percentage of your debts and write off the remaining amount.

This usually involves making monthly payments towards your debts, based on how much you can afford after your other financial commitments have been covered, over a five-year period (although the timescale can vary depending on what is agreed with your lenders).

On successful completion of the IVA, you will be legally debt-free.

An IVA is often considered a preferable alternative to bankruptcy, as it avoids some of the downsides. However, as with bankruptcy, there will still be a significant impact on your credit rating for six years.

4. Debt Relief Order (DRO)

A Debt Relief Order is a new debt solution, brought in on April 6th 2009 to help people with a low income and few assets.

You can only qualify for a DRO if:

you are unable to repay your debts in full
you owe less than £15,000
your assets are worth less than £300 (except a car, which can be worth up to £1,000)
your monthly disposable income (after tax, national insurance contributions and regular household expenses) is no more than £50
you live in England or Wales, or have carried out business in these countries in the last three years
you have not been subject to another DRO in the past six years
you are not involved in any other formal insolvency procedure (such as bankruptcy or an IVA).

You`ll pay a £90 fee when applying for a DRO, after which an Official Receiver will consider your case.

If the DRO goes ahead, you will then be protected from action by your lenders for the duration of the DRO.

At the end of this period (usually 12 months), you will be legally debt-free.

5. Bankruptcy

Many people in debt will view bankruptcy as the last resort - and for some it is - but in some cases, bankruptcy can be the best option.

Bankruptcy proceedings are usually over within a year (as opposed to the five years an IVA normally takes) although you may be required to make contributions for a total of three years). Also, if you do not have a regular income, you will not be able to commit to the regular payments required in an IVA - in which case bankruptcy may be your only option.

However, bankruptcy will have a severe impact on your credit rating, and could well lead to the repossession of your home and your car.

For more information on ways to clear your debts, click here or call our debt advisers on 0800 195 2911.

Try our debt solution finder

Answer a few simple questions and find out which debt solutions could help you, based on your circumstances.

Please remember, this is just an information tool. We would always recommend you speak to a debt advisor for the most appropriate way to resolve your debt problems.

We'll give you an on-screen recommendation and call you. One of our advisors will be in touch to answer any questions you may have about your results.

Your privacy is important to us. All correspondence is held in the strictest confidence and we will only request information required to find your debt solution.

Tags: debt, clear debt, without loan, pay off debt, pay debt, no loan, without loan, clear debt, write off debt, write off debts, debt management, IVA, non essentials, budget