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

1. You have more than one lender.
2. You’re not sure how much you actually owe, or when it’ll be repaid.
3. Your debt payments leave your account on different days of the month.
4. Your debt payments are more expensive than your mortgage or rent.
5. 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.

Simplify your debt

These debt solutions all leave you with one monthly payment to make – but each solution is different. Debt consolidation is for people who are already comfortably making their debt repayments. Debt management is for people who are struggling and can’t afford their debt repayments. An IVA is an alternative to bankruptcy and is for people with very problematic debts.

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.