How to use a debt consolidation service to reduce your debt

Debt consolidation loans are an increasingly popular way for families experiencing debt problems to try and get back in control of their finances. Even though the number of borrowers suffering bankruptcy has increased, there are a number of good and effective steps that can be taken to avoid this fate. Although much of the stigma surrounding bankruptcy has reduced, there are still a number of unsavoury consequences so taking any practical step to avoid being subject to a bankruptcy proceeding is highly desirable.

Once a thorough review of the family finances has been made it should identify where the main cost items are. If these are associated with credit or store card repayments or for loans where the monthly repayment is high due to the short term of the loan then a debt consolidation loan may help. The aim is to get the net monthly payment reduced to lower than that existing on the current debt. This is achieved by applying for enough money on the debt consolidation loan to pay off the existing loans and card balances and have the repayments over a longer time period.

Although the total amount of interest repaid over the terms of the debt consolidation loan may be higher the longer term gives relief from capital repayments meaning that it should be possible to free up some cash-flow for other needs. This then reduces the number of lenders making any subsequent negotiations easier to handle.

If the debts are serious and large it may be necessary to consider an Individual Voluntary Arrangement (IVA). Using the services of a licensed insolvency practitioner it is usually possible to agree terms with all the lenders where they will accept a lower payment over a period of up to five years. This is the final legal step before bankruptcy so making sure that any plan agreed is affordable is vital – and this is where expert help and assistance is valuable.

At the end of the IVA term any unpaid debt balance is written off and the borrower can start again with a clean sheet. IVA’s are private arrangements between borrowers and lenders whereas a bankruptcy is fully public. Although an IVA stains a credit record it is far less damaging than a bankruptcy order and, as such, is easier to recover from by rebuilding a record of regular payments with borrowers.

Debt will not go away. It takes positive and decisive action to get on top of debt and the earlier such action is taken the more choice and the better the terms will be. Leaving debt to get out of control limits options and increases the cost so act early and be ruthless in defining an effective debt management strategy.

1 thought on “How to use a debt consolidation service to reduce your debt

  1. I agree with this, I think people need to be made aware of the other forms of debt relief that there are, bankruptcy is a severe option and debt consolidation is further borrowing. From my experience in seeking debt help, debt management plans and IVAs are the best solutions to debt problems because you are paying it off without getting into more debt. I went on a debt management plan because my debts weren’t high enough to enter an IVA and now I am debt free.

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