IVA v debt consolidation - a comparison

IVAs (Individual Voluntary Arrangements) and debt consolidation loans are very different solutions to debt problems. As such, they tend to be appropriate for people in very different situations.

IVA & debt consolidation - different solutions for different people

Debt consolidation loans

A debt consolidation loan is a way of repaying multiple debts by taking out a single, larger loan and using it to pay them off. This can reduce a borrower`s monthly debt repayments, as it gives them an opportunity to assess their finances and calculate how much they can really afford to put towards their debt per month. This is an important benefit of debt consolidation, as their financial situation may have changed a great deal since they borrowed money in the first place - and this is something they can take into account when they figure out how quickly they can repay the consolidation loan.

(Of course, repaying a debt more slowly is likely to end up costing more in total, as it`ll spend longer accruing interest - even though the debt consolidation loan could well come with a lower interest rate than the debts it paid off.)

Debt consolidation also makes it much easier to keep track of debt repayments, reducing the risk that they`ll forget to pay a debt on time. This is another significant benefit, as making a debt repayment late - or forgetting it altogether - can mean they incur charges and damage their credit rating (which can make obtaining credit harder and more expensive in the future).

Debt consolidation is an option that`s open to anyone who can get approval for a loan. So while some people take out a debt consolidation loan because they`re finding it hard to make their monthly debt repayments, others do it purely to simplify their finances or give themselves a bit more leeway in their monthly budget.

IVAs

An IVA is a different matter altogether.

• First of all, it`s a legally binding agreement - a form of insolvency.
• Second, it`s only available to people who fit certain criteria.
• Third, it can actually write off a portion of the borrower`s debt.
• And fourth, it can only go ahead if enough of the borrower`s creditors agree.

In general, a borrower must owe multiple creditors a total of £15,000 or more to be eligible for an IVA. They must also be unable to keep up with their debt repayments as they stand - if they`re able to keep on making the payments, their creditors will expect them to!

Basically, an IVA is an agreement between a borrower and their creditors. The borrower must be able to commit to making fixed payments for a fixed period (5 years, with most IVAs). If they`re a homeowner, they`ll probably also have to release some equity from their home towards the end of the IVA (in the 54^th month). Their creditors, in return, will agree not to pursue any legal action against them, to freeze interest and to write off any outstanding debt at the end of the IVA.

An IVA can`t go ahead unless creditors who collectively `own` 75% of the borrower`s unsecured debt agree to the IVA proposal, which tells them how much the borrower can afford to repay. It`ll also stay on their credit report for a year after the IVA has finished, which can make credit harder to obtain and more expensive.

Need to know more?

If you`d like to know more about IVAs and debt consolidation, click here for more on IVAs, or here for more on debt consolidation. Alternatively, you could call freephone 0800 195 2911 for free, no-obligation debt advice.

Tags: debt, debt consolidation, loans, debt consolidation loans, iva

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