The TecBlast Blog

Is debt consolidation the best option for me? With times as they are, there’s a real requirement for those with debt problems to understand the differences between consolidation and the various other options available - and understand which one could be right for them at a time like this.

Firstly, it could depend on what the future holds. In a recession, it’s more likely to be bad news - when consumer spending drops and companies lose money, many companies can be forced to make people redundant just so they can stay afloat. For anyone thinks their employer is thinking about laying off staff, a debt consolidation loan might not be a great idea.

One of the most attractive benefits of consolidating debt is its ability to reduce a person’s monthly repayments. Debt consolidation is most effective when the person is in a reasonably stable financial position: when they know what’s coming in and what’s going out, they can figure out the best way of repaying their debt.

With a stable income, the debtor can calculate how much they can afford each month, and arrange to repay the debt consolidation loan at the correct speed - not too slowly and not too quickly (stretching their monthly budget dangerously thin).

So someone facing the prospect of being out of work could be better off looking into a debt management programme, rather than debt consolidation. DMPs offer a flexible approach to debt: borrowers can ask debt advice advisers to negotiate with their creditors on their behalf, asking them to agree with more flexible repayment terms.

A debt management programme is an informal agreement that isn’t legally binding, so someone on a debt management programme can ask the debt management company to go back to their creditors if their financial situation worsens - if they lose their job, for example, their debt management company can ask their creditors if they’ll accept nominal payments for a while, until they find new work.

Individual Voluntary Arrangements take a lot of commitment and can require homeowners to free up some of the equity in their property. Borrowers must be able to commit to making fixed monthly payments for (normally) six years, based on the maximum they can afford once they’ve taken their essential expenses into account. Even so, an IVA can make all the difference - for people whose debts have gradually got out of control, as well as people faced with a sudden drop in income. Of course, IVAs do require a level of financial stability: if the individual doesn’t feel they can commit to five years of regular payments, an IVA may not be the right option for them.