Debt consolidation: Is it the right option for me? As we go into the recession, there’s a real need for people with debt problems to understand the differences between debt consolidation and the various other options available - and understand which debt solution could be right for them at a time like this.
Firstly, it could depend on what could happen in the future. In the credit crunch, it’s more likely than usual to be bad news - when consumer spending decreases and businesses lose money, many businesses are forced to make redundancies just so they can stay afloat. For anyone anticipates that their company is thinking about making redundancies, a debt consolidation loan might not be a good idea.
Why? One of debt consolidation’s most attractive benefits is its ability to reduce a person’s monthly repayments. Debt consolidation is most effective when the person is in a reasonably stable financial situation: when they know how much they’re earning and how much they’re spending each month, they can figure out the best way of repaying their creditors.
With a regular salary, the debtor can work out how much they can afford each month, and arrange to repay the loan at the most suitable speed - not too slowly and not too quickly.
Someone facing the prospect of redundancy may be better off looking into debt management, rather than a debt consolidation loan. Debt management programmes offer a flexible approach to debt: borrowers can ask debt professionals to talk to their creditors on their behalf, asking them to agree with more flexible repayment terms.
A debt management plan is an informal arrangement that isn’t legally binding, so someone on a debt management plan 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.
But unemployment isn’t always the only problem. In a recession, many people face the prospect of a reduced income, rather than no income at all. Someone with significant unsecured debts might find they can’t keep up with their debt repayments if their income drops and isn’t likely to rise again. Rather than a debt consolidation loan, they might be better advised to look into an Individual Voluntary Arrangement, a form of insolvency that could actually write off the debt they can’t afford to repay - as well as allowing them to reduce their monthly debt repayments.
IVAs 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.
