If you are struggling to maintain the payments to your credit cards and/or loans – or you are overwhelmed by the many different companies that you have to pay individually – you may want to consider consolidating your debts. There are a few different ways to consolidate your debts so it’s important to understand how they work, how much they may cost, and which option will be best suited to you.
So, what does debt consolidation mean?
Consolidating your debts means combining all of your unsecured debts (credit cards, overdrafts, store cards and loans) into one single payment plan resulting in your monthly repayments becoming more affordable and manageable for you. By consolidating your debts, you’re essentially bringing all of your debts under one roof and making a monthly payment to a company who will distribute the funds to your creditors on your behalf.
What are my options?
Typically, there are three options when it comes to consolidating your debts: A debt management plan (DMP), an individual voluntary arrangement (IVA), or a consolidation loan.
A Debt Management Plan (DMP) is an informal and flexible financial solution that allows you to consolidate payments to your creditors through an FCA-regulated company. Your payment is simply calculated by taking your monthly income and removing all of your monthly expenses leaving you with a ‘disposable income’ to pay towards your plan. It’s highly likely that the creditors will accept the repayment arrangement, freeze all interest and charges, and contact you a lot less – if at all. One of the benefits of a DMP is you will not be required to take out any further credit.
An Individual Voluntary Arrangement (IVA) is a more formal way to consolidate your debts; it works in a similar way to a DMP, however, it is legally-binding, a little less flexible, but it does have a definitive end date – usually 5-6 years. Your payment amount is calculated in the same way as a DMP, there will be no interest and charges applied by the creditors, and they will not be permitted to send unnecessary correspondence to you. It may be more beneficial for you to take this option if the timescale of a proposed DMP exceeds 6 years.
A Consolidation Loan allows you to move all of your existing debts into one loan; it is a form of further credit so you will have to pass a credit-check before you are accepted, and you will usually have to pay interest on the agreement. With a consolidation loan, you will agree to payment amount for a certain duration so you’ll have an end date, but if your situation changes and the payments are no longer affordable, you may find that the agreement is not flexible. Whilst a consolidation loan will help you to consolidate your debts, it might not be the best option for you if you have been struggling to maintain a higher payment amount.
Need a little extra help?
Consolidating your debts could be the answer to all of your financial needs, but it can be a huge decision taking that first step; there’s also much more to the options listed above, so it might be wise to seek further help and advice before applying. Not only can Angel Advance offer confidential help and advice on all UK-based financial solutions, we also provide both DMPs and IVAs. You can check your eligibility by using our free Online Debt Advice Tool or by calling us on 01925 599400.