Everything You Need to Know About Debt Consolidation
As the cost of living crisis continues to bite hard on many families and individuals, a lot of people are looking for debt consolidation options. In fact, the average credit card debt per household was at its highest at £2,626 in 2019 – long before the COVID pandemic and the war in Ukraine had an impact on our finances.
Now, as we enter 2023, recent research has highlighted that our personal finances are getting worse, not better. So, how can debt consolidation potentially help with your financial situation?
Book a no-obligation consultation with NDH Financial today for more information.
What You Need to Know About Debt Consolidation
Debt consolidation covers a range of solutions available for those who are struggling with their finances. It is any kind of agreement or option that allows you to wrap up all your outstanding debts into one monthly payment. Put simply, it allows you to 'consolidate' multiple debts into one.
However, debt consolidation isn’t for everyone. If you are really struggling to keep up with your priority bills, such as your mortgage repayments or your energy bill arrears, then debt consolidation is unlikely to help. Furthermore, if you are struggling to buy food or keep up with essentials, you likely need a different kind of financial assistance.
You need to ensure that you have enough money to pay the agreed monthly payment, otherwise consolidating your debts will not help you and, in some circumstances, may compound your issues.
Additionally, if your problem is poor money management then debt consolidation may make a difficult situation worse. If you consolidate all your debts and it appears more manageable, you may feel things are more under control and therefore take on more debts or overspend, worsening your problems. In this case, it would be best to prioritise improving your money management skills first.
On the other hand, for many people, debt consolidation can be a huge help. Also, depending on what option you choose and your financial history, it can be relatively easy to arrange. Depending on the debt consolidation option that you pick, you can often consolidate your credit card debts, store card debts, personal loans, student loans, and overdrafts all into one payment.
What Types of Debt Can You Include within Your Debt Management Plan?
Debt consolidation can be very useful and helpful, particularly if you're getting frazzled by endless bills popping through your letterbox or you're struggling to keep track of what direct debits are coming out of your bank, and when they do so.
By consolidating your debt, you only need to pay one monthly bill instead of a load of them. That payment will be due at the same time each month, making it easier for you to budget around it accordingly.
Also, if you're finding that you're mostly just paying off the interest on debts, then debt consolidation could be for you as it will likely reduce your interest considerably. One debt will usually incur less interest than multiple debts, providing your credit score allows it.
Debt consolidation also reduces the amount of people and organisations you have to deal with. At the moment, you may have to contact different companies to discuss your debts with them. This can mean spending a lot of time on numerous phone calls and sending loads of emails or chatbot messages.
It may become frustrating or stressful as you get sent from one department to another, or spend ages on hold. By consolidating your debts, there is only one organisation to deal with and to speak to.
Consolidating your debts can also potentially help to improve your credit score, as you can get back on top of your finances and prove yourself to be a more reliable payer.
What Debt Consolidation Options Are Available Right Now?
As a personal insolvency specialist, with our own fully licenced Insolvency Practitioner, NDH Financial recognises and understands the financial troubles that some people are facing right now. Although we personally specialise in IVA (individual voluntary arrangement) debt solutions, we do recognise that everyone's financial situation is different.
There is no ‘one size fits all’ solution when it comes to financial predicaments and personal finance issues. Here, we’ll explain the different kinds of debt consolidation options available, and how they might help you.
There are many debt consolidation options available in the UK right now. Some will be more suited to you than others. Below, we explore some of these options.
A very popular, formal, debt consolidation option is an individual voluntary arrangement (IVA). This is a legally binding arrangement between you and your creditors that helps you pay off your debt at a rate that is affordable to you. These payments are normally monthly and spread over five or six years.
When your IVA comes to an end, any unsecured debt that is outstanding is written off. You can also often choose to make a one-off payment known as a lump-sum IVA.
You can only get an IVA through an licenced insolvency practitioner such as the one here at NDH Financial. Our insolvency practitioner is licensed to handle IVAs, and our team can help you work out what payments you can afford and how long your IVA should last.
You would need to give us details of your financial situation, including your income, assets, your outstanding debts, and your creditors. From this, we will be able to judge if an IVA is best for you.
IVAs could be a suitable debt solution for you if:
- Your debts are higher than £10,000. You can get an IVA if your debts are less than this but, other solutions may be more suitable.
- You have more than one debt.
- Your creditors are based in the UK. If your creditors are based in the EU, then an IVA may not cover you.
- You are based in England, Northern Ireland, or Wales. IVAs are not available in Scotland, where their equivalent is a Trust Deed.
- You have spare money each month to pay your creditors. Your creditors are unlikely to accept an IVA if you can't pay at least £80 a month, as other options may be more suitable. However, there can be some flexibility in this, depending on your circumstances. For instance, if you have less than £80 a month but can sell something that will raise a significant lump sum, you may be able to pay off your creditors using this lump sum instead.
An IVA can have its risks and downsides, as will any consolidation option. For instance, if you start earning more money during the period of your IVA, you have to declare this to your insolvency practitioner so that they can adjust your payments accordingly. If you sell an asset, like your house, you may be required to introduce additional funds and, again this has to be declared to your insolvency practitioner.
If you win the lottery or come into inheritance then this is likely to have to be paid towards your IVA.
Basically, as paying off the debt is a priority once you start an IVA, any upturns in your financial situation will be directed towards your debt repayments, although an insolvency practitioner will always take account of any increases in your expenditure
Also, an IVA will affect your credit rating, and as it is a formal agreement, if you later change your mind and want to cancel, there are steps that will need to be taken before the IVA is no longer in place.
Interested in finding out more about how IVAs work? We’ve answered some of the top queries related to this debt solution in our IVA Learning Hub.
Debt Management Plans
A debt management plan (DMP) can be ideal if you are struggling with finance issues like credit card bills, bank loans, overdrafts, or student loans. It is not, however, suitable for priority debts such as your mortgage arrears, gas, and electricity debts, magistrates court fines, council tax arrears, TV licence fees, or maintenance payments to children or ex-partners.
A DMP is essentially an informal arrangement between you and your creditors, which allows you to pay your debt in one agreed monthly payment. This is then usually divided between all your creditors by a DMP provider, who ensures they are all paid correctly.
A DMP is not legally binding and, as such, you can walk away from it at any time. You are not tied to it for any set period.
A DMP could be ideal for you if:
- You can afford to pay your priority debts such as mortgage payments, energy bills, and council tax. You are also able to afford essentials such as food.
- You can find the agreed payment each month without it impacting on your priority debts.
- You would prefer to pay one monthly payment instead of numerous ones. Especially if it helps you to budget or to keep track of your finances.
- You would be happy for someone else to deal with your creditors.
- You are disciplined and will keep up your payments despite a DMP not being legally binding.
With a DMP. you will need to make the agreed payment until the debt is paid in full, and it is usually not suitable if it would take you 10 or more years to repay the debt. Also, whilst creditors may agree to free interest and charges, this is not guaranteed, and there is no formal, legal protection preventing them from taking further legal action.
Balance Transfer Card
A balance transfer card is a specific kind of card that is designed for debt consolidation. It allows you to take the outstanding balances from several credit cards and transfer them all onto one card.
The balance transfer card will normally have a low or zero percent interest rate on the transferred debt for a limited period of time. This is often twelve months, but may be up to five years if you can find a good deal. By giving you this option, it gives you a good chance to clear your debt before the interest kicks back in.
Balance transfer cards help you consolidate multiple debts into one monthly repayment.
Balance transfer cards may be ideal for you if:
- You are aiming to clear your debt fast. If you can clear the debt within the low interest period, you can make big savings on interest repayments and get the debt quickly under control. If you take too long to clear the debt, you may face a pretty high interest rate when the low interest period ends.
- You are currently paying several credit card payments per month and wish to reduce this to one easy-to-manage payment.
- You want to improve your credit score. Whilst getting a balance transfer card may initially negatively affect your score, it can help you to gain control of your finances again and will prevent missed payments. This will eventually improve your score again.
- You have good self-discipline. Your balance transfer card is only there to help deal with your debts. If you become tempted to spend on it, you could find yourself facing very high interest rates and making a difficult situation worse.
- Your credit score is good. If your credit score is bad, most of the good deals will be out of reach. So you may not be able to get a card with a 0% interest period or, if you can, it might be for a much shorter amount of time than you had hoped for.
Debt Consolidation Loans
If you’ve got a lot of different creditors and you aren't managing to keep up with your repayments, you can put them together into one loan. This can potentially lower your overall payments as you are now only paying interest on one debt rather than many.
You essentially borrow a loan that covers all your outstanding debts. You pay the debts with this loan, wiping them out. This means you now only have to pay back the loan.
There are two types of debt consolidation loans - secured and unsecured. A secured loan means it is secured against an asset – usually your home. If you fail to pay back the secured loan or miss payments, you are at risk of losing your house. An unsecured loan isn't secured against any assets.
If you have a bad credit history or if you owe a large amount of money, you are likely to struggle to get an unsecured loan. Loan companies will want the security of knowing they can get their money back, so will want to secure it against your house or other large assets.
Always think carefully before taking out a secured loan as even if you feel you can keep up the repayments now, if you suddenly get too sick to work or you are made redundant, you may struggle to do so. Then you are in real danger of losing the roof over your head.
Only use a debt consolidation loan if:
- You know you will be able to keep up the payments, regardless of your job status, your health, rising interest rates, and any other potential unknown factors.
- Your savings aren't wiped out by fees and charges.
- Your interest goes down compared to when you were paying the individual debts, and the total amount you are paying is also less.
- You have had professional advice regarding your debt management.
The Benefits of Consolidating Your Debts
There are numerous benefits to consolidating your debt. Below, we explore some of these in more detail.
Reduces Overall Cost
When you consolidate your debt, it is likely to reduce your future payments as they are normally spread out over a longer term. On one hand, this means your debt will last longer as it may be distributed over five years instead of three, for example – but it can help to make the monthly payments more manageable. This means you are less likely to fall behind with any payments.
Reduce the Chances of Late Payment
By only having one payment, it is unlikely you will forget to make it or lose track of it. Also, if it is coming out regularly at a set time, you can know how to budget around it and can ensure you have the finances available in your bank to cover the correct amount.
Increase Your Credit Score
When you apply for a new loan, you may see a temporary dip in your credit history. This is because the organisation giving you the loan has made a hard credit inquiry and this normally negatively impacts your score. However, debt consolidation can reverse this.
Firstly, by consolidating your debt, you may be paying off credit card bills or other revolving lines of credit. This can reduce your credit utilisation rate and will be reflected in your credit report. If you can get your credit utilisation rate under 30%, then your credit score will significantly improve.
If you make consistent payments and ensure that they aren’t late, this will also improve your credit score in time. Furthermore, eventually clearing the loan in its entirety will prove you are a reliable payer and can improve your score even more.
Similarly, if you enter into an IVA, your credit score may go down upon agreeing to it. Once you have completed it, it will be updated to confirm it has been completed, and after 6 years, the IVA will be removed altogether. Also, your other debts will be marked as settled or satisfied once the IVA has been completed. As all entries are updated after 6 years, you should notice an improvement from this point.
Could Lower Interest Rate
If it’s been a while since you applied for your loans or credit cards, it’s possible that your credit score may have improved since then. If it has, then when you consolidate this debt, you may well find the interest rates you’re paying go down. This can save you a lot of money, especially if you consolidate over a shorter period of time.
Obviously, some debts will inherently have a higher interest rate than others and there is nothing you can do about this. For instance, credit cards normally have higher rates than loans. As such, when you consolidate your debts, you may find that you wind up paying more interest on certain debts and less on others. You will therefore need to figure out what works best for you.
The IVA will freeze all interest and charges once it is approved.
Get Closer to Writing Your Debts Off
If your consolidated payment has less interest attached to it than the individual payments you were paying, this might allow you to pay extra towards your debt each month in order to clear it faster.
By clearing the debt faster, you not only relieve yourself of a lot of stress but also dodge the interest that would have been attached to your future payments. Paying off your debt early can also help to reflect well on you in the future.
With the IVA, the payments are for a set period, so as long as you make the payments, any remaining debt at the end will be written off.
Combine Your Debts into One Easy Payment
If you combine multiple debts into one single loan you reduce the number of payments you need to worry about and also potentially lower your interest rates.
There is only one direct debit coming out of your bank at one time of the month, and you know exactly how much that payment will be. If you usually receive bills or email reminders, this will be drastically reduced as you are only dealing with one entity now.
Discover the Best Debt Solution for You with Help from NDH Financial
As you can see, there are numerous different options available when it comes to consolidating your current debts. Although different options will suit different people, they will all offer you the ability to turn multiple debts into one that’s more manageable.
If you have found yourself in debt, remember that you are far from alone when it comes to financial struggles, particularly in today’s climate. It doesn’t necessarily mean you have been irresponsible with your cash or done anything wrong, it just means you need to get yourself back on the front foot. Acknowledging the fact that you’re having problems and trying to find the right solution to resolve them is one of the first steps, so you are certainly on the right path.
We at NDH Financial are experts at providing people with IVAs. IVAs can be an ideal option for many people who have higher debts, as they offer them the chance to consolidate these debts whilst also ensuring that their house remains safe. If there are any unsecured debts at the end of the IVA, these are written off.
If you feel an IVA would suit you, please get in touch with us at NDH Financial. In fact, even if you are unsure what option is best for you, we are happy to review your circumstances and make you aware of the available solutions, for you to decide what is right for you.
Contact NDH Financial for Further Information about Writing Off Debt
As this page shows, there are various scenarios in which you would be able to achieve a debt write-off. However, we emphasise that the information here should be seen only as guidance - the onus is on you to discern what debt solution would best meet your needs.
At NDH Financial, we specialise in IVAs - they can be an ideal option for people who are struggling financially with more than one unsecured debt, so they’re worth considering if you come under that umbrella, especially if your circumstances mean you do not want to apply for bankruptcy, or are unable to obtain a DRO. If you’d like to find out a little more about the IVA process, our IVA Learning Hub is the place to be!
If you remain unsure whether it is practically possible for you to write off your particular debt, feel free to call us on 0800 002 9051 for further information or to apply for an IVA.
Do You Have Any More Questions?
Our IVA Learning Hub Can Help
We know you might have questions and that’s fine.
We can answer most of those on our call.
But we’ve also built our learning hub so that you can learn more about an IVA and see if one is right for you.
Click below to check it out.