What Can Debt Consolidators Do For You?
The term debt consolidation is often misunderstood, or at least not fully understood. Too many people think that it simply refers to the process of taking out a big loan to pay off all your debts. This is one way to consolidate your debts, but it is rarely a wise thing to do. The other form of debt consolidation is achieved using a debt management plan to consolidate all your debts into a single payment. This is generally a much more effective solution and is the main process we will be focusing on.
What Is Wrong With Taking Out A Loan?
When you are struggling to keep up with payments on your debts, the last thing you need is to take on even more debt. When you pay off your debts with a loan, all you are doing is transferring your debts to a different creditor. They do not get any smaller and in reality they usually get bigger. This is because the new loan is usually spread over a much longer period. In doing this it means you keep on paying for much longer and ultimately end up paying far more than you would under your original debts, even though the size of your monthly payment may be smaller.
Most people who take out this type of loan end up paying more in the long run. There are a few situations when this option can be the most sensible thing to do, but they are relatively rare compared to how often they are actually used. If your existing debts are at a very high interest rate and you are able to get a new loan at much lower rates, then it may be a reasonable solution.
The key is to not be drawn into automatically including all your debts under the new loan. You should only borrow enough to pay off the debts which are at a higher interest rate. If some of your debts are at a lower interest rate than the new loan, you will just be costing yourself more from the start if you borrow money to pay them off.
How Does A Debt Management Plan Work?
In contrast to a loan, a debt management plan is all about bringing down the amount of your debts from the very start. An advisor from the debt consolidator that you choose will talk to all of your creditors to set up different terms for paying back your outstanding debts. They will seek to get interest rates cut and even reduce or eliminate any extra fees that have been added on for late payments, etc.
When they have reached agreements with all your creditors they will be able to set up a payment plan where you just make one, smaller monthly payment to them instead of dealing with all your separate creditors. As well as being much simpler for you to organise, and keep on top of, the actual amount you are paying out will have gone down too.
Will I Qualify For A Debt Management Plan?
Professional debt consolidators operate all over the UK so you can get a debt management plan whether you are in England, Scotland, Wales or Northern Ireland. Exact requirements will vary from company to company, but in general you will need to be over 18 years of age and be struggling to keep up with payments on your debts. The money you owe will need to be to a few different companies, usually two or three as a minimum and the debts will need to be of the unsecured type. This includes most of the standard things like credit cards and personal loans, but you cannot include secured debts like mortgages in a debt management plan.
You will also need to have some source of steady income because you still need to be able to afford to make a regular monthly payment towards your debts. The consolidator will be looking for evidence that you have a salary or wage that is enough to leave you a certain amount spare to pay into the plan after covering your essential household expenses.
What If I Cannot Get A Debt Management Plan?
If you have a particularly large amount of debt and are in a position where you really can never afford to repay everything you owe, you may be entitled to use a solution called an IVA or individual voluntary arrangement. This is a special arrangement for UK residents whereby instead of rearranging your debt payments so that you can find a more affordable way to repay what you owe, you actually just pay back a portion of the debts and write off the rest.
Whereas a debt management plan is an informal arrangement, an IVA is a legally binding agreement. This has certain advantages, but also makes it much harder to change your mind. When you enter into an IVA you agree to pay a certain amount each month towards your debts for a set period of time, and after than anything that has not been repaid is written off.
Anyone eligible in England, Wales or Northern Ireland can get an IVA and for residents of Scotland there is a similar solution called a Trust Deed. Any good UK debt consolidator will be able to set up either of these for you.
For US residents, the nearest equivalent to an IVA would be debt settlement, which also involves writing off debt rather than repaying it in full.
Finding The Best Debt Consolidators
It is only fair to say that not all companies that offer to consolidate your debts will be trustworthy or fair. You need to be aware that some will give you advice based on what is most lucrative for them rather than best for you, and that you could end up worse off if you get involved with one of the less reputable companies.
You should not let this put you off using a debt management plan, however, as there are plenty of thoroughly honest organisations with long track records of successfully helping people out of debt. You just need to be sure that these are the ones you look to for help.
In the UK there are a few obvious things you can start with in terms of finding the best companies. First of all you should check to see if they are members of DEMSA (the Debt Managers Standards Association). This is approved by the OFT (Office of Fair Trading) and members have to abide by set guidelines. These include things like following OFT guidelines, using clear and truthful advertising, providing proper training for staff and a host of other things designed to protect consumers.
It is also a useful safeguard to apply to at least two companies so that you can make a comparison between the offers they make and the service you receive.