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Debt Consolidation vs IVA

Given Britain’s record level of personal debts, it’s hardly surprising that we also have a massive range of debt solutions for consumers in the UK.  Phrases like, “debt management,” “debt consolidation,” “IVA,” and “bankruptcy,” are thrown around loosely. But many of them are completely different from the others. Take, for example, a debt consolidation loan and an IVA.  These are two widely used debt solutions that are very different from one another. But what are the differences?

Debt Consolidation

Debt consolidation often refers to a particular type of loan, designed to cover the total cost of all your other debts. This loan is then used in its entirety to pay your debts off leaving you with one simple monthly payment to handle. The benefits of a debt consolidation loan are obviously that it makes repaying your debts a much simpler process. But in addition, there is not necessarily any negative impact on your credit score, as the smaller debts are all being paid off by the new, bigger debt consolidation loan. So, provided you stay on top of your debt consolidation loan repayments, there should be no detrimental effect on your credit score.

IVA

An IVA has one thing in common with a debt consolidation loan: it results in one simply monthly payment for the debtor. However, it’s very different solution. Firstly, the IVA or Individual Voluntary Arrangement is a government introduced initiative designed as an alternative to bankruptcy. It essentially involves an agreement between a debtor and his or her creditors whereby a monthly repayment is negotiated based on what the debtor can realistically afford on a month to month basis. The payment is made each month for a set period of time, most often 5 years. This often amounts in total to significantly less than the total amount of the debts but at the end of that period, the debts are considered to be settled in full. Unlike a debt consolidation loan, an IVA can have a detrimental effect on your credit rating.

These are just two of the available debt solutions in the UK. What is hoped, however, with the recent announcement about compulsory debt management classes in schools, is that the future generations will rely less on debt solutions and more on good money management skills.