Simplify your debt

Debt is part of the modern world. The latest figures from the Bank of England show that total ‘consumer credit’ lending rose by 0.2 billion in July, ‘credit card’ lending rose by 0.3 billion in July and debt ‘secured against dwellings’ rose by £0.7 billion in July this year.

Debt doesn’t always have to be a problem, but the following five situations are ones that could mean your debts are more complicated.

You have more than one lender.
You’re not sure how much you actually owe, or when it’ll be repaid.
Your debt payments leave your account on different days of the month.
Your debt payments are more expensive than your mortgage or rent.
Your debt payments are just unaffordable.

There are three kinds of debt consolidation which can help you to simplify your debts – but each one if different and only suitable in certain circumstances. You can find out more if you click here.

A debt consolidation loan can address points 1, 2 and 3. You could find it simpler to consolidate all your debts into one loan, with one (cheaper) monthly payment. Just bear in mind that spreading the loan over a longer term may reduce your payments now, but could cost you more in interest overall.

If points 4 and 5 sound like your situation, debt consolidation is probably not right for you. A more suitable way to simplify your finances may be with debt management or an IVA.

A debt management plan is an informal agreement with the people you owe money – who may accept lower monthly payments and even freeze interest and charges. It’s one way of consolidating your debts into one affordable monthly payment with the help of a debt management company.

As with debt consolidation – spreading your debt repayments over a longer period may mean you pay more in interest overall (if the interest isn’t frozen) and making lower payments will be recorded on your credit file for six years.

Debt management can help people who are struggling to make their unsecured debt repayments (credit cards, personal loans, etc.). People could struggle to make those payments if the amount they owe is very high compared with what they earn, although there are all sorts of reasons why people struggle to repay their debts.

IVA (Individual Voluntary Arrangement)

An IVA is a formal and legally binding agreement between you and your unsecured lenders, which should make your monthly payments more affordable.

An IVA can make managing your debt simpler, partly because you pay an Insolvency Practitioner (IP) to deal with your lenders for you and negotiate a new agreement with them.

IVAs are also simpler as you only have to make one monthly payment. At the end of a fixed period (usually five years) any unpaid debt would be written off, assuming you’ve stuck to your side of the deal throughout.

However, an IVA is a form of insolvency and as such, would be noted on your credit file for six years – making borrowing more difficult and/or expensive. Also, on an IVA you might be asked to release equity if you own your own property, which wouldn’t happen on a debt management plan.