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With all the debt advice on offer, what do I choose?

14 September 2009

With so many options available to people in debt, deciding on the right debt solution can be difficult.

Each debt solution is designed to help people in different situations, so it`s always worth speaking with a professional debt adviser to help establish which one is right for you.

How do I choose the right debt solution?

The right debt solution will depend on your circumstances. You should always speak with a debt adviser to be sure about which is right for you, but here is an introduction to help you get started.

Manageable debts

If you are managing to cover all your debt repayments at the moment, but feel you would benefit from reducing your monthly outgoings and simplifying your finances, then a debt consolidation loan could help you.

This is a new loan designed to cover multiple existing debts, after which you will repay your new lender in single monthly instalments - essentially `consolidating` multiple debts into one.

Many people who consolidate their debts will repay the loan over a longer period of time than their original debts, reducing their monthly payments in the process. This can be a big boost to your finances on a month-to-month basis, but be aware that you will also pay interest for longer - and therefore could pay more overall.

However, it may be possible to save money both monthly and in the long term if your debt consolidation loan interest rate is low enough. If you are consolidating debts with higher interest rates, there`s a good chance you could save money, but keep in mind that the longer you take to repay the loan, the less chance there is of saving money over the duration of the loan.

Unmanageable debts

If you cannot afford your existing debt repayments, you`ll need a debt solution that can help to make your debts more affordable.

One debt solution that can do this is a debt management plan. This is an informal arrangement with your lenders in which you`ll make lower monthly payments towards your debts (based on how much you can afford once your other commitments have been covered) over a longer period of time.

You may also be able to negotiate a freeze or reduction in interest and other charges, which can prevent your debt from growing.

This can be arranged by you alone, or if you are unsure about how to negotiate with your lenders, a professional debt management company can do the hard work on your behalf.

Be aware that, as with a debt consolidation loan, repaying your debt over a longer period may mean you pay more overall, unless your interest rate and other charges are reduced or frozen.

If you find yourself in significant financial difficulty, an IVA (Individual Voluntary Arrangement) may be right for you. Like a debt management plan, this involves making lower monthly payments towards your debts, but unlike a debt management plan it is a legally-binding arrangement.

An IVA enables you to repay a set percentage of your debts, and write off the rest. You will usually make monthly payments for a period of five years, after which you will be legally debt-free.

IVAs are widely considered a preferable alternative to bankruptcy, as they avoid some of the downsides (such as you losing your home), but there will still be a significant impact on your credit rating.

If you`re in debt and looking for a way out, click here or call one of our expert debt advisers today on 0800 074 8639.

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