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IVA, another way to consolidate debts in the UK

IVA, another way to consolidate debts in the UK

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Some of our clients are struggling with debt. Although our speciality is mortgages, we decided to give you some tips on consolidation in the UK, with a particular focus on IVA, or Individual Voluntary Arrangement. If you are planning to buy a property but are struggling with debt, you will find this article very useful.

IVA, another way to consolidate debts in the UK

What is debt consolidation in the UK?

In the simplest terms, debt consolidation is merging several liabilities into one. With this solution, you pay off all your loans with a single instalment, usually on more favourable terms and with a longer repayment period. Consolidation is advantageous in that, in the event of any further problems, you negotiate with one instead of several creditors.

You can benefit from such a loan if:

  • you have credit card debt
  • you have several cash loans
  • you have a few short-term loans to pay back
  • you are in overdraft

Consolidation loans themselves are divided into:

  • secured by a pledge, for example of real estate (secured)
  • unsecured

These basic facts should suffice for now. If you want to learn more about the pros and cons of a consolidation loan, we encourage you to read the Money Helper article.

What is debt consolidation in England?

Debt consolidation in England is done on a settlement basis. It involves a mutual willingness on the part of the debtor to come to an agreement with his creditors. In practice, consolidation involves borrowing from one of the specialised companies. The money obtained in this way must be used to repay the debts.

As we mentioned before, with consolidation, you will be paying off your debt with a single instalment and the great bonus value is often a longer loan term. Unfortunately, nothing comes for free. Debt consolidation could be more expensive option in the longer term as it could mean paying more in total interest. Consolidating your loans may involve fees to your lenders. In addition, late or incomplete payments will affect your credit score, and if the amount of debt is high, you will be obliged to use your house or car as a loan protection. Source: Money supermarket.

When does consolidation make sense and when does it not?

While consolidation is a good step towards financial freedom, it is not always worth choosing it. According to Money Helper, consolidation is wise to consider when:

  • Savings from a consolidation loan will be higher than any fees and charges
  • You are able to pay the instalments on the new loan
  • You want to reduce your expenditure in order to repay your debt
  • The total interest rate on the consolidation loan (APRC) will be lower than before
  • IVA is not possible in your case or you do not want to use it

Consolidation makes no sense if:

  • You cannot afford to pay the new instalments
  • A consolidation loan will not help you pay off all your current debts
  • Consolidation loan costs will exceed savings
  • It is possible to conclude an IVA

What instead of consolidation?

Debt consolidation makes sense, especially if your total amount of liabilities is high and the instalments are within your budget or just a little above it. However, if the problems are very serious and you are unable to pay instalments, it is essential to consider an IVA, or Individual Voluntary Arrangement.

Individual Voluntary Arrangement

An IVA is a voluntary agreement between a debtor and creditors. It can be entered into in England, Northern Ireland and Wales (source: Stepchange). An IVA is used to pay debts such as:

  • overdraft,
  • cash loans,
  • catalogue debts,
  • consumer loans paid in instalments,
  • debts on a credit card or shop card,
  • tax arrears to HMRC

Source: Money Helper

Before signing the agreement, your finances will be checked and questions will be asked to help you work out repayment amounts for the rest of your debt. Also be aware of the fees associated with consolidation and other conditions that need to be met when signing an Individual Voluntary Arrangement.

If you need specialist help with debt consolidation using a UK mortgage, then I would encourage you to use our UK mortgage adviser – Extend Finance! We can advise you on choosing the right bank, advise you on the best solution and show you what to look out for when consolidating debts in the UK.

What if I live in Scotland?

We have already mentioned that an IVA cannot be established in Scotland. However, this does not mean that there is a lack of similar legal arrangements for debtors in that country. The Scottish equivalent of an IVA is a Trust Deed (source: Scottish IVAs). You can use this form of assistance if:

  • You are a Scottish resident, meaning you spend a minimum of 183 days in Scotland and
  • You are struggling with debt over £5,000 and
  • You are employed

Using Trust Deed, your Trustee helps you negotiate with your lenders, calculates a new monthly instalment for you and settles with your existing creditors.

Key features of the Trust Deed are:

  • This is the main alternative to declaration of bankruptcy
  • Lenders may not take further action in relation to obligations covered by the Trust Deed
  • Debts remaining at the end of the repayment period will be written off

A more comprehensive description of the Trust Deed can be found here and here.

Summary

  • Debt consolidation in the UK is the ability to pay off several debts by combining several instalments into one. You can combine debts from bank loans, credit cards, mortgages, unpaid bills.
  • Debt pooling in the UK involves an agreement between the borrower and the creditors. By using consolidation, the instalment amount is tailored to the debtor’s budget and financial capacity. This allows you to avoid a receiver in your home.
  • The option to combine debts is worth taking advantage of if your debt exceeds several thousand pounds. It may not be cost-effective to combine smaller debts, due to the costs to be incurred when consolidating debt.
  • An IVA (Individual Voluntary Arrangement) allows several debts to be pooled and a single instalment, with a smaller value, to be agreed. What is more, the acceptance of the agreement by your creditors implies a freeze on interest. In addition, the number of instalments you can obtain is 60, i.e. the maximum repayment period is five years.
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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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