Types of debt consolidation
There's more than one way to consolidate your debt repayments. Each method is designed to help with different circumstances, but they all have a few things in common:
- They can all help to reduce your monthly outgoings
- They can all replace multiple debt repayments with just one
Some methods of debt consolidation are designed to help with unmanageable debts (e.g. debt management plan, IVA), while others are intended for people who are managing well, but still want to reduce their outgoings (e.g. debt consolidation loan).
Here are a few of the most common types of debt consolidation:
Debt consolidation loan
This is a new loan that can be used to pay off multiple existing debts. By doing this, you'll be left with just one monthly payment - instead of many - which can make managing your finances a lot simpler.
What's more, by repaying your new loan over a longer period of time, you could reduce the amount you pay each month. For example, let's say you had £8,000 of debts to be repaid over three years, costing you around £220 a month (plus interest). By repaying your new loan over six years, you could reduce your monthly payments to just over £110 (plus interest).
Just remember to be cautious about securing any debts against your home, as missing repayments could result in the sale of your home. Also keep in mind that extending your repayment period could increase the total interest to be repaid.
Debt management plan
This is a solution for unaffordable debt repayments. It's an agreement between you and your lenders in which your unsecured debt repayments are reduced to an affordable level, leaving you with enough money to cover your other costs.
Interest and charges may also be reduced or frozen, meaning more of your payment goes towards paying off the debt itself (although this can't be guaranteed). The arrangement will normally continue until your situation has improved sufficiently, or until you have completely paid off the debts.
Find out more about debt management plans
IVA (Individual Voluntary Arrangement)
If you can't see yourself ever being able to repay your unsecured debts in full, but don't want to go bankrupt, one option could be an IVA. This is an agreement with your lenders that enables you to repay as much of those debts as you can for (normally) five years, and on successful completion any remaining unsecured debt will be written off.
Find out more about IVAs
Debt Arrangement Scheme (DAS) - Scotland only
Exclusive to Scottish residents, DAS is basically a formal debt management plan. It rolls your unsecured debt repayments into one and reduces the amount you pay to an affordable level. You will make these reduced repayments until the debts are clear, or until you can afford to make full repayments again.
Interest and charges will be frozen, meaning more of each payment you make goes towards the debt itself.
Find out more about DAS
These are just a few of the solutions available to people in debt. Visit our debt solutions page for more information on the range of solutions we provide.
