Consolidation Loan or an IVA?

Under what circumstances would an IVA be suggested as the most appropriate debt solution when a consolidation loan is still a viable possibility?

Making A Comparison

To determine the answer to this question we need to look at each option in turn and assess its capabilities. Only then will we be able to compare them.

We should also point out that this article is written specifically to talk about how best to consolidate 'problem' debts.

Consolidation loans

Consolidation loans are recognised as the default method for restructuring debts, when the sole aim is to reduce monthly outgoings.

A consolidation loan will also have the added benefit of reducing the amount of creditors you have, making your finances easier to manage. And, as long as you manage to keep up the repayments, a consolidation loan will also protect your credit worthiness too.

Put these points together and you can see why for the majority of people, in the majority of circumstances, taking a consolidation loan will be the right course of action.

Consolidation loans can be quick to arrange and are discreet, have no damaging affect on your credit rating and demonstrate prudence.

Reaching the tipping point

The problem with consolidating really only occurs beyond the tipping point.

The tipping point we're referring to is the point at which a person's budget takes on a negative balance, when their total outgoings can no longer be met by their total income.

Contrary to popular opinion, the 'tipping point' is very difficult to simply sense through gut instinct alone and, in truth, would normally only reveal itself after a careful financial assessment has been undertaken.

However, because we are all busy living our day to day lives, it's unlikely we'd undertake such a financial review it'll it's too late. As a result, many people live perilously close to their financial tipping point and are completely oblivious to it.

Beyond the tipping point

So, what happens when you stray beyond the tipping point?

Well, in simple terms, when you're spending more money than you earn, you'll have a shortfall in your financial budget.

Initially, this shortfall will be indiscernible and you'll manage to live with the deficit in your budget quite unwittingly, by using your credit cards, store cards or overdraft, just as normal.

But over a period of time, the balances of your outstanding debts will begin to rise, slowly at first but, nonetheless, rise.

The extra cost of the rise in debt becomes more expensive to maintain, so the hole in your budget grows, each month getting slightly worse.

Rolling, rolling rolling...

Imagine a parked car on top of the brow of a hill, without any handbrake to hold it in position. When it starts to roll, the motion might not be obvious at the very beginning, but it would quickly gain momentum and beyond a certain point, there would be no stopping it. The outcome would be unavoidable.

This simple analogy helps to visualise the nature of going beyond the tipping point.

It doesn't take a lot of imagination to see the momentum of the car represents the momentum of your growing debt.

Hit the brakes!

So what do you do if you're beyond the tipping point.

Will another consolidation loan be enough to stop the momentum of spiralling debt? Well, quite possibly, if you catch it early enough. There is a point in time when restructuring your debt into a lower payment will have the desired affect and return your budget to a positive balance.

But if the saving is insufficient to close the gap in your budget, another loan on its own won't be enough.

You'll have to take further action, such as increase your income, or reduce your essential living costs sufficiently to keep within your budget.

If you can do that, then you stand a chance of recovering your situation and regaining control.

None Borrowing Alternative

There's a degree of logic to the old saying: 'You can't borrow your way out of debt.'.

Well, an IVA provides a logical answer to the problem before us.

When someone has passed the tipping point and their debts are out of control, i.e. growing bigger without spending more, an IVA provides the opportunity for them to regain control without the need to borrow more money.

The IVA Option

The IVA provides the alternative by simply removing your legal liability towards your unsecured debts by replacing it with a new legally binding agreement.

Payments to the new IVA agreement are based on affordability, ensuring that your personal living costs are protected and accounted for as a priority and, because IVA repayments are based on affordability, the pressure to financially overcommit yourself is removed.

The IVA agreement is also based on a pre-agreed 'fixed term'. This means that your payments stop at that specific time, whether or not the full debt has been repaid. If there are any unpaid debts at the end of the agreed term, the creditors are legally bound to write them off.

Because an IVA is a legally binding agreement, once it has been accepted, your creditors can't simply demand changes to it. This is designed into the agreement to give peace of mind to the applicant.

The IVA benefits

Here's an outline of the fundamental benefits that an IVA guarantees to provide:

  • Potential of significant debt write-off.
  • Monthly payments based on affordability.
  • Easy to manage single monthly payment.
  • Pre-agreed Fixed term, usually set to 5 years.
  • Legal protection from creditor action.
  • Guaranteed freeze on debt interest.
  • Guaranteed freeze on late payment charges.
  • Stops creditor contact regarding further debt recovery.
  • No credit check required as its not a loan.

As you can see, in many respects an IVA has all the advantages of the consolidation loan but, crucially, there is one huge difference.

You are guaranteed to be debt free when your IVA successfully reaches the end of its term because your creditors are legally obliged to write off any outstanding balances at the end of the agreement.

Take Professional Advice

If this article has given you food for thought, then perhaps you'd like the chance to have a private conversation with one of our professional debt advisers.

Simply call 0800 088 7503 to speak to an adviser or, alternatively, complete the form below and someone will call you back at your preferred time.

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