While personal insolvency is far more common than you might think, each and every case is unique, so methods of...
For most people who find themselves with problem debt, their financial difficulties haven’t become overwhelming overnight. Instead, such debts have arisen as a result of an accumulation of a number of financial decisions made over time. Taking out credit cards, store cards, small loans, hire purchase, instalment plans and the like from multiple sources can build up into a lot of money to repay and can sneak up on the unwary due to it being hard to keep track of lots of small amounts leaving an account at various different times of the month. Personal Insolvency often happens this way.
When keeping track of multiple direct debits and payments becomes difficult, the attraction of debt consolidation is clear. Moving all the various debts to a single place and paying it off with a single monthly payment rather than multiple payments throughout the month can make paying off such debts more manageable.
Debt Consolidation Loans
As the name suggests, this involves applying for a loan which is equal to the sum of money owed for all the forms of credit currently held and then using the money borrowed to pay off all those debts, leaving the borrower only one creditor to repay, usually over a number of years.
Depending on the amount needed and the credit rating of the borrower, this may well be a suitable option and borrowing larger amounts can sometimesbe done at more attractive rates of interest than the interest charged for smaller credit amounts. It is possible, therefore, that this option may well see you paying less in interest overall, as long as the duration of the loan isn’t excessively long. However, do bear in mind that a lower APR rate may well cost more in interest if paid over several years as opposed to two or three.
It is usually a good idea to pay as much as you can afford, and overpay if you can, to reduce the overall interest you pay.
Balance Transfer Credit Cards
For those owing money on multiple credit cards, using a balance transfer credit card for debt consolidation can be attractive and for those with good credit ratings, it’s possible to transfer the balance, from every other credit card held, for a fee,( usually between 3-5% of what’s being transferred) and pay no interest at all for a set period.
Usually you won’t be able to transfer balances between credit cards issued by the same provider, and getting a zero percent credit card is generally only possible for those with the best credit scores. So, if you’ve maxed out a number of credit cards already, you may not be able to get a transfer card with a large enough available balance to cover the cards you want to transfer. Also be cautious of the interest rates once the interest free period has ended.
If you do successfully transfer your other credit card debts to a balance transfer card, be very careful to meet every single payment on time. If you miss a payment, the terms on most of these cards mean that the o% deal will end and you’ll usually be liable for the regular rate of interest from then on.
Debt Management Plans& Debt Consolidation
If the ‘self service’ debt consolidation methods mentioned above aren’t available to you, you might be attracted by the promises offered by companies offering ‘Debt Management Plans’ as a way to deal with problem debt by consolidating them into a single, managed, monthly payment.
Companies offering DMP’s will assess your debts, attempt to deal with your creditors on your behalf and rather than paying multiple creditors, you’ll pay the Debt Management Company a single monthly payment and they’ll manage the multiple payments on your behalf.
Unfortunately, creditors are under no obligation to deal with the Debt Management Companies if they don’t want to and even if they agree to do so, they’re free to change their mind at any time and can choose to pursue you again.
If you’re considering a debt management plan as an option, then you’re likely to be far better off with an IVA (Individual Voluntary Arrangement) which works in much the same way, but is supervised by a Licensed Insolvency Practitioner, is binding on all parties once agreed and may well leave you with less to repay and a shorter repayment period.
Debt Consolidation – Make Sure You Address The Cause
While debt consolidation can work for some, don’t forget to take a look at the situations, the habits and the decisions which caused the debts which needed to be consolidated.
A tempting trap which many fall into, is to consolidate, feel like the problem is under control and simply continue with the poor habits which caused their debt problems in the first place. This will inevitably lead to more action being needed at some point in the future. Far better to treat the cause rather than the symptoms. Prevention is better than cure.
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