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Types of debt consolidation

4 November2009

Debt consolidation could be an ideal solution for you if you have multiple unsecured debts that you`re looking to repay.

A lot of people think that consolidating your debts always involves taking out a loan - but this isn`t necessarily the case. `Debt consolidation`, as a general term, can apply to any debt solution that effectively combines your debt repayments into one monthly payment - and there are a number of ways this can be done.

What type of debt consolidation is right for me?

The right kind of debt consolidation for you will depend on your circumstances. It`s important to understand the ins and outs of each debt solution before you make a decision.

Debt consolidation loan

A debt consolidation loan is a new loan designed to pay off your existing debts, leaving you with just one debt and one monthly payment to deal with. It`s often possible to reduce your outgoings by repaying the loan over a longer period of time than your original debts.

Best for: people with manageable debts, who would like to simplify their finances and/or reduce their monthly outgoings.

Be aware: repaying any debt more slowly can add to the overall cost, due to interest (although this may not be the case if the debt consolidation loan comes with a lower interest rate); as with any loan, it`s vital that you`re sure you can afford the repayments.

Debt management plan

This is an informal arrangement with your lenders in which you`ll make reduced monthly payments towards your unsecured debts, based on what you can afford once your essential expenses have been accounted for. It`s possible to arrange a freeze or reduction in interest and other charges.

Best for: people struggling with unmanageable debt, who cannot afford their existing debt repayments but could afford to repay the full debt over time.

Be aware: debt management will have an impact on your credit rating, and would only be suitable if you can`t afford your existing monthly debt repayments; creditors aren`t obliged to agree to any changes to the way you`re repaying your debts.

IVA (Individual Voluntary Arrangement)

A formal arrangement with your unsecured lenders in which you`ll repay as much of your debt as you can afford over a set period (usually five years), after which your lenders will write off the rest.

Best for: people who cannot afford to repay their debts in full within a reasonable period of time.

Be aware: an IVA will have a significant impact on your credit rating - you should only enter into an IVA if you are certain it is the right option; may require you to release equity from your home if you`re a homeowner.

All of the above debt solutions have their advantages and disadvantages, and you should always speak with a professional debt adviser to discuss which is best for your needs.

For more information on various types of debt consolidation, click here or call 0800 195 2911 today.

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