IVA Debt Consolidation – All You Need to Know, FAQs & More
If you’re struggling with crippling debt, then chances are that you’ve been looking up debt solutions and options to get yourself out of it.
There are a number of approaches you can take to take care of your debt but sometimes, the number of options available to you as a debtor can be a source of confusion.
In this post, I’ll be looking at IVAs as well as debt consolidation loans to determine which option would be more suitable for you depending on your financial circumstances.
What is an Individual Voluntary Arrangement (IVA)?
An IVA is a formal and legally binding agreement between the debtor and his/her creditors which states that the debtor will make payments towards their debts for an agreed-upon period of time (typically five years).
Once this duration is over, any remaining debt that the debtor has will be written off.
It’s important to note that the debtor will only make monthly payments that are affordable to them.
An IVA also prevents creditors from taking any legal action against the debtor while it is in place. Thus, it protects the assets of the debtor.
Furthermore, when an IVA is in place, all interest and additional charges on the debts are frozen as well.
While an IVA does take a long time to complete (typically five to six years), it’s an extremely flexible and affordable solution for debtors and it ensures that you’ll be debt-free by the end of it.
An IVA is managed by a focal person known as an insolvency practitioner. The insolvency practitioner deals with both you as well as your creditor to ensure everything runs smoothly and no party involved in the IVA is treated unfairly.
Insolvency practitioners are typically accountants or lawyers and are licensed by the Insolvency Practitioners Association. If you ever feel you’re being treated unfairly by your IP, you can report them to the Insolvency Practitioners Association.
Please note that in order to be eligible for an IVA under the IVA Protocol, you need to have a minimum of three different debts with a minimum of two different creditors.
What is a Debt Consolidation Loan?
Taking out another loan when you’re trying to get rid of your debt may seem counter-intuitive.
However, a debt consolidation loan is a wonderful approach towards making your debts a lot more manageable and your payments a lot more affordable.
Suppose you have a number of different debts with many different creditors. All of them have different interest rates and you’re finding it very hard to deal with all of them at once.
This is where a debt consolidation loan comes in. The idea of a debt consolidation loan is to take out a single loan in order to pay off and settle your debts with all of your previous creditors.
In this way, you’ll only have the debt consolidation loan to deal with now and you’ll only be answerable to a single creditor.
In this way, you make your debt a lot more manageable as you’d now be dealing with only a single creditor.
However, this aspect isn’t what makes the debt consolidation loan such an attractive option for most debtors.
A Lower Interest Rate
The main reason that makes debt consolidation loans worthwhile is if you choose to opt for one that has a lower interest rate compared to the debts you already have.
Of course, if you opt for a debt consolidation loan that has a lower interest rate compared to the debts you have currently, you’re going to end up paying a lot less money overall.
Thus, you can reduce the overall amount you pay simply by combining all your debts using a debt consolidation loan with a lower interest rate.
Always make sure to gather all the information you can from a lender and be aware of any hidden and additional charges they may have.
You have to keep in mind that sometimes, while the interest rate on a debt consolidation loan may be lower, the duration of your monthly repayments may be a lot longer. This may cause you to still pay more money than you were before, even if the interest rate was lower.
If you already owe a lot of debts to different creditors, chances are that your credit rating might be quite low. It’s quite likely that lenders will refuse to give you a debt consolidation loan at a low interest rate if you have a poor credit rating. Thus, this is definitely something you need to be aware of.
|A debt consolidation loan is almost never worthwhile if it is at a higher interest rate than your current debts.|
What’s Better: an IVA or a Debt Consolidation Loan?
Honestly, when it comes to debt solutions, there’s no real one option which is objectively better than the other.
What may be better for you may not be better for another debtor. All of it depends on how much debt you have, your assets and your financial circumstances.
If You Can’t Pay Back Your Debt in Full
An IVA can be great for you if you can’t afford to pay back your debts in full. This is because when the agreed-upon period of an IVA ends, any remaining debt you have left is written off.
This isn’t the case when you consolidate debt, of course. You’ll still have to pay back the debt in full if you go for this route.
If You have Valuable Assets
If you have valuable assets such as a car and a home and you want to protect them, then opting for an IVA would be a much better option.
Keep in mind that a debt consolidation loan is still a loan and it won’t protect you from legal action from your creditor in the event that you fail to make your monthly payment (or monthly repayments).
If you start missing payments towards your debt consolidation loan, then your creditor will most likely pursue legal action to make you bankrupt.
IVAs are flexible
IVAs are a lot more flexible when it comes to your monthly payment compared to a debt consolidation loan.
Your IP will be working closely with you to ensure you’re only making payments that are affordable to you.
Furthermore, your IP is a person who you can always go to for advice and information throughout your IVA. They will guide you and provide you with information to ensure your IVA is a success. You don’t have any such guidance when you opt for a debt consolidation loan unless you hire a private debt management company.
This is what makes IVAs one of the best debt solutions available in the UK.
There are a number of debt solutions and approaches you can opt for in order to take care of your debt.
However, you must keep in mind that not every solution is the best one for your particular situation.
This is why it’s important to be thorough and seek information and professional advice in order to determine which option would be the best for you.