Debt consolidation v IVA - Which is better?
Debt consolidation loans aren’t ‘better’ than IVAs (Individual Voluntary Arrangements). IVAs aren’t ‘better’ than Debt consolidation loans.
Both debt solutions can offer borrowers a sensible, realistic way to repay their debts, but they work in very different ways and often suit people in very different situations.
Debt consolidation & IVA – Who are they right for?
IVA
An IVA can be appropriate for people with significant levels of unsecured debt: in most cases, people who owe a total of £15,000 or more to multiple creditors. What’s more, IVAs are only appropriate for people who:
- cannot keep up with their debt repayments, but
- can commit to making smaller, fixed payments for a fixed period of time (normally 5 years).
Debt consolidation loan
Debt consolidation loans, on the other hand, are normally available to anyone with more than one unsecured debt.
- Some people take out a debt consolidation loan because they’re finding it hard to (or cannot) keep up with their monthly debt repayments and need to bring them back down to affordable levels.
- Others can afford their debt repayments, but choose to consolidate their debts because they want to reduce their repayments, freeing up some of their disposable income for other things.
Debt consolidation & IVA – How do they work?
IVA
A form of insolvency, an IVA is a legally binding agreement between borrower and creditors that offers some real benefits to both. If the borrower and enough of their creditors can agree on terms:
- The borrower will agree to make fixed payments throughout the IVA. If they’re a homeowner, they may also be required to free up some of the equity in their home to pay to their creditors.
- In return, the creditors will agree to accept lower monthly payments and not pursue any legal action against the borrower. They’ll also agree to write off any outstanding debt once the IVA is successfully concluded.
So the borrower gets to reduce the size of their monthly payments, and write off the debt they can’t afford to repay. They also get a ‘light at the end of the tunnel’: a date when they know they’ll be debt free.
And the creditors get a guarantee of 60 monthly payments – for creditors, the thought of accepting smaller, reliable payments can often sound better than the thought of hoping for larger payments that the borrower can’t really afford and probably can’t make reliably.
Debt consolidation loans
A debt consolidation loan is simply a loan that people take out to pay off multiple smaller debts (e.g. credit/store card bills & overdrafts). Rather than paying multiple creditors every month, they’ll pay just one – the loan provider who gave them the debt consolidation loan.
So what’s the point of a debt consolidation loan? People’s circumstances change, and they may no longer have as much ‘spare’ money in their monthly budget as they’d expected. Taking out a debt consolidation loan gives them the chance to figure out how much they can afford to repay each month – and to arrange repayment terms that fit with that.
They might also find a debt consolidation loan with a lower interest rate than their ‘old’ debts, especially if they’re paying off high-interest debts like store cards.
Debt consolidation or IVA – Which is right for me?
So it’s not a matter of ‘better’ or ‘worse’. The question is ‘which is right for me?’
If you’re in debt and thinking about a debt consolidation loan or IVA, this information may help you decide which debt solution is likely to be more appropriate for you, in your situation.
You may also find this page useful: Bankruptcy v IVA – Which is better?
Tags: debt, debt consolidation, iva, consolidation, debt consolidation loan