Debt Consolidation Loan or IVA: which is best for me?
If you’re having problems with debt and you are looking for a way out, the range of options on offer can be overwhelming. Each different debt solution is suited to a different situation, and it’s important to understand which is best for you.
Here we look at two debt solutions that could help you get back in the clear: debt consolidation loans and IVAs (Individual Voluntary Arrangements).
Debt Consolidation Loan
A debt consolidation loan involves taking out a new loan to pay off some or all of your existing debts – meaning those debts are replaced with a convenient single payment to make each month.
In some cases, your payments may be lower than they were before. Repayments to a debt consolidation loan can often be stretched over a longer period of time than the original debts, meaning you pay less each month. However, this would mean you will be paying interest for longer, so you may end up paying more in the long run.
Likewise, interest rates are often lower too. For example, if you have paid off credit card debts with an APR of 19%, a debt consolidation loan is likely to have a much lower interest rate.
Equally, even if your payments don’t change much, some people simply prefer the convenience of only one monthly payment, instead of many.
Best for: people with relatively manageable debts who want to simplify their finances and/or make their monthly payments lower.
IVA (Individual Voluntary Arrangement)
An IVA (Individual Voluntary Arrangement) usually requires you to have over £15,000 of debts that you can no longer afford to repay. It involves a legally-binding agreement to repay a fixed amount each month. This usually lasts for five years, depending on your terms.
An IVA will not completely pay off your debt, but once you have finished your repayment period, the debt will be considered settled.
Because your creditors will not receive everything they are owed through an IVA, the IVA proposal must be formally approved. This is done through a formal Creditors Meeting, in which all of your creditors vote on whether to approve the proposal.
Creditors accounting for at least 75% of your debt must vote in favour for the IVA to go ahead. However, if this happens, even those who voted against the IVA must accept the terms.
Best for: people with over £15,000 of debt who find themselves unable to pay it back. IVAs are usually considered a preferable alternative to bankruptcy. As the Insolvency Service put it, “The principal statutory alternative to an IVA is bankruptcy. Bankruptcy should always be the last resort as the debtor will lose control of their assets and will be subject to bankruptcy restrictions, potentially up to 15 years.”
Useful Pages:
IVAs | Debt consolidation loans
Tags: debt consolidation loan, iva, individual voluntary arrangement