When you’re in debt, and have multiple loans, it can seem that the only way to get out of the situation is by taking out one big loan to consolidate them all. But before making this decision, have a look at some of the other options available to you, as some may be more appropriate than taking out another loan.
Managing your money
The first step to managing your money effectively is to identify where it goes and learn how to control your spending. You can make a start by following the key points below
- Make a note every time you spend money and take cash out of the bank for about a month. This will show you where your money is going and can often be quite enlightening!
- Create and follow a monthly budget and be sure to include all the different types of expenditure. If you have significant debts, you’ll find our Statement of Affairs calculator useful.
- Your spending diary and Statement of Affairs calculations will help you identify patterns in your spending and highlight areas where spending could be reduced, so take these into consideration when deciding where you can make cutbacks and begin spending within your means.
- Debts with a high APR will be the most expensive, so pay these off first, even if you have a bigger amount of debt elsewhere. Using this tactic will save you much more cash in the long run.
Debt management plans
Create one of these plans by contacting your creditors and asking them if they will reduce your monthly payments and freeze any interest they are charging you. They may agree but the arrangement will not be legally binding and they could choose to terminate it whenever they wish. The deal will also need to be assessed every six months – but this will give you a little time, hopefully enough to organise your finances.
If you need some help putting a debt management plan together, Citizen's Advice and the Consumer Credit Counselling Service (CCCS) can help you create one free of charge.
It’s always preferable to reach a temporary agreement with your creditors than miss any payments. If you do create a plan however, be aware that it will show on your credit record and default notices may still be issued.
Individual Voluntary Arrangement
One of the differences between a debt management plan and an Individual Voluntary Arrangement (IVA) is that an IVA is a legally binding contract that may last five years, for example. This will allow you to reduce your monthly payments and write off a part of your debt. Once the agreement is made, any reduction in payments or in the total amount that you owe is set, provided that they agree.
However, IVAs aren’t always the best solution and for most people, other solutions such as budgeting, a consolidation load, a debt management plan or bankruptcy are better alternatives.
IVA costs can be substantial, so be wary of taking debt advice from companies that sell IVAs as it’s likely that this is where they make some of all of their money. It’s always wise to seek advice from independent sources such as Citizen's Advice before making any decisions.
Bankruptcy
If you feel that your debts are increasing uncontrollably, and you have no control over them, accepting that you may have to file for bankruptcy sooner rather than later may be the best course of action. Understandably, it’s not a position that people feel comfortable with initially, but ultimately most people end up feeling ok about it. By this point, the majority of people have learnt enough to ensure that they don’t get into the same situation again.
Once you’re listed as being bankrupt, you’ll be able to keep items of reasonable value such as your fridge, sofas and your DVD player, but you’ll have to give up your home, cars and anything worth over £1500. Bankruptcy affects your credit rating for six years and your name has to be published in the London Gazette and the local paper. Also, some professions do not allow individuals to be employed whilst they are bankrupt.
Despite what most people think, bankruptcy is usually a better alternative than an IVA as the majority of your debts are cleared and you’ll be discharged from bankruptcy within a year. Payments that need to be made to the court last just for a short while, not usually more than three years.
Consolidation
If you’re now thinking ‘Bankruptcy is too much hassle, I’ll just consolidate’ -- then WAIT!
If you’re now thinking ‘That’s too much hassle, I’ll just consolidate’ - then WAIT!
Consider whether getting a loan to pay off other debts is really the best course of action. The Consumer Credit Counselling Service has found that consolidating debt helps just 3% of those in serious debt. Also, our research has found that more than half of those who consolidate slip back into debt by using their cleared credit cards. What’s more, consolidation isn’t always the most cost effective option.
So before making your decision, consider the alternatives available to you, beginning with better budgeting in the first place.
For those seriously in debt
If you have significant debts, ensure you get in touch with your creditors before they have to contact you. They don’t want to go to court any more than you do, and will try and find ways around it. Your debt problems won’t go away if you ignore them – they get much worse! So, don’t annoy your creditors by avoiding them, just speak to them if you are in financial difficulty and face your problems head on.
Back to our main loans page »