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Debt consolidation alternatives

28 January2010

A debt consolidation loan can enable borrowers to make their debts more manageable by reducing their outgoings and simplifying their finances. In short, it`s a new loan taken out to pay off existing debts, basically combining these debts so the borrower starts making one monthly payment instead of many.

It`s often possible to reduce your monthly outgoings by repaying the new loan over a longer period of time than the original debts - although this may mean paying more interest overall.

However, debt consolidation is only suitable for some people. Before you take out a debt consolidation loan, you should be sure it`s the right option for your circumstances.

When is debt consolidation appropriate?

A debt consolidation loan is only likely to be suitable if your existing debts are relatively manageable, but you would like to simplify your general month-to-month finances and/or improve them by reducing your outgoings.

If, for example, you have long-standing debts that are going down slowly (such as credit card or overdraft debts, which tend to have fairly flexible repayment terms), a debt consolidation loan can be a good way of trying to make sure these debts are paid back more rapidly: and since you`ll have a structured repayment plan for your new loan, you`ll know exactly how long the debt will take to pay back.

However, if making your debt payments is already causing you problems, then a debt consolidation loan is unlikely to be suitable. The reduction in monthly payments on a debt consolidation loan probably won`t be big enough to make a significant difference to your finances - in which case you may want to consider another debt solution.

What are the alternatives to debt consolidation?

If a debt adviser has told you that a debt consolidation loan is not right for your circumstances, there are a number of alternative debt solutions that could help. Two of the most common ones are:

Debt management plan - an informal agreement with your lenders in which you`ll repay your debt in smaller amounts over a longer period of time. Your lenders may also reduce or freeze interest and other charges, which can prevent your debt from growing while you`re paying it off.

Note that repaying any debt more slowly can damage your credit rating, potentially making it harder and/or more expensive to get further credit for six years (the length of time it`ll stay on your credit report).

IVA (Individual Voluntary Arrangement) - a formal, legally binding agreement in which you`ll repay what you can afford of your debt over a set time period, and your lenders will write off the rest.

It`s not an `easy way out` of repaying your debts, though - an IVA lasts five years, in which time you`ll be expected to repay as much as you can each month, and your credit rating will be significantly affected. Despite this, IVAs do avoid some of the downsides of bankruptcy, although bankruptcy can still be better for some people.

For help and guidance on debt consolidation and other debt solutions, click here or call 0800 195 2911 today.

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