For those with deeper-rooted debt problems there are four broad options - debt consolidation loans, debt management plans, IVAs or, in worst-case scenarios, bankruptcy. This week I'm going to briefly examine each option, their pros and cons and who they are right for - for a more in-depth guide, check our debt solutions section:
Debt consolidation loans
With a debt consolidation loan you could roll all your existing debts into one new loan - so instead of dealing with five or six repayments each month, you just have one. By extending the loan term you could also benefit from a reduced monthly repayment, saving you some cash each month. With this option remember that you're paying back less each month, so it will take longer to clear the debts.
If you decide to take this option, it's vital to shop around for the best rates. Moneysupermarket.com has exclusive access to the lowest homeowner loan rate in the UK - available from First Plus at 6.6% APR. Homeowner loans are generally more readily available and can carry lower rates than personal loans because you are offering the lender security with the equity of your home placed against your debts.
If you have missed repayments in the past the leading rates may not be available to you, so use our Smart Search tool to compare your options without leaving a footprint on your credit profile.
Debt management plans
If debt consolidation isn't an option for you, perhaps because you've been turned down for a loan, then a debt management plan may be suitable to help reduce your monthly repayments and assist you with getting back on top of your debts.
Providers of debt management plans will help you work through your income and expenditure and then act on your behalf to agree a repayment plan with your creditors. Most will also try to negotiate a freeze or reduction on interest payments, although none can guarantee this. For this service debt management companies charge a fee which normally ranges from 15-17.5% of the monthly repayment.
One of the most well-established companies in this field is Baines and Ernst, which has been helping clients reclaim control of their finances for more than 10 years. If you have debts in excess of £5,000 you may wish to see if this company can assist you.
Individual Voluntary Arrangements (IVAs)
IVAs are suited to people with larger levels of unsecured debt, typically £15,000 or more and across three or more different creditors. Unlike a debt management plan an IVA is a Government approved scheme which means the arrangement is legally binding. The advantage here is that once agreed, your creditors are no longer allowed to pursue the debt by law.
To file for an IVA an insolvency practitioner will draw up a proposal for you to repay a specified amount, normally over a five year period, as full and final settlement of your debt. The companies that are still owed money agree to wipe out the remaining debt once the agreed sum is repaid. The amount you pay is based on what you can reasonably afford taking account of your regular income and expenditure.
IVAs allow you to repay debt at an affordable rate and all fees are included in the affordable monthly payment amount.
My advice is that you should visit our debt solutions section and read our debt guides for more advice on how they work and then shop around for a practitioner that understands your problems and who you feel you can trust.
If you decide an IVA is right for you, call the Debt Advisory Centre for further information and advice.
A legal action that draws a line under your debts but will also result in a loss of assets and you will be subject to the control of the court. This can be disastrous if used in the wrong circumstances so take independent advice before contemplating bankruptcy.
Whatever your debt circumstances, seek advice; consider all your options and do all you can to bring your outgoings under control. Don't look for an easy way out - consider your long-term financial stability and take a thorough look at the market before taking action. The moneysupermarket.com debt solutions section can help find the right debt solution for you.