Best Loans Articles

Ever since it has been possible to take out a loan, or borrow money, people have been getting into difficulty with their financial situation.

In past times, this was particularly socially unacceptable and those who could not afford to repay their loans and other debts were thrown in the debtor’s prison. If this were still the case today, the prisons in the UK would be even more overcrowded than they already are.

Personal debt on loans and credit cards is still continuing to grow, despite the recent recession and slow down in the economy and with the total amount of personal debt in the UK standing at around £1,457 billion, excluding home owner loans, mortgages and secured loans, it is little wonder that an ever increasing number of individuals are struggling to keep up with their monthly loan repayments.

In many cases, people are falling behind with their loan repayments and building up significant arrears on their personal loans and credit cards, whilst actually increasing their debt levels to make ends meet, rather than reducing the amount they owe.

So, what should someone in this situation do to get themselves out of what inevitably becomes a downward spiral of debt? There are a number of options available to people who are struggling to manage their finances and the course of action taken will depend on the magnitude and severity of their debts. Some of the options are discussed below, but it is important not to rush into the first option which presents itself, as this could actually make matters worse in the long term.

Debt Consolidation Loan

For those individuals who have a number of personal loans and credit card balances outstanding, it may be possible to take out a debt consolidation loan, providing that all the existing loans and debts are up to date and have no outstanding or previous arrears problems.

The purpose of a debt consolidation loan is to combine a person’s various debts into one loan and therefore only have to deal with one monthly repayment amount. A debt consolidation loan may be an unsecured loan, or secured on the borrower’s property, depending on the amount borrowed. It is important to ensure that the interest rate charged on the new loan is less than those of the debts which are being repaid, there is no point switching a credit card with a zero per cent rate to a loan with a ten per cent rate, for example.

In many cases, the term of a debt consolidation loan is longer than those of the debts being consolidated. Although this will reduce the monthly repayment amount, interest will be charged over a longer period and therefore the loan may work out more expensive than the previous debts over time.

Debt Management Plan

If it not possible to be accepted for a debt consolidation loan, the next step is often to apply for a debt management plan. This type of plan is usually managed by an independent company who will deal with all the various loan and credit card companies on behalf of the borrower. The management company will negotiate with all the various creditors and agree a reduced monthly repayment amount which is affordable for the borrower. The borrower will then make a single monthly payment to the debt management company who will distribute the funds accordingly.

They are also likely to charge a fee for their services which will be included in the monthly amount and the borrower should check on the amount of this before committing to the plan, as it could be significant. The benefit of a debt management plan is that the company will deal with your creditors on your behalf, although it is possible to come to an arrangement with loan and card companies directly, which is likely to save money, but the borrower is doing the work themselves.

Taking out a debt management plan is likely to damage an individual’s credit rating, although someone in the position where they are looking at this option is probably already in this position and such a plan could help to repair it over a longer period and it is a less formal course of action than an individual voluntary arrangement.

Individual Voluntary Arrangement

Individual Voluntary Arrangements (IVA’s) are for people with severe financial problems and are in arrears and unable to keep up with their repayments on a number of personal loans and credit cards.

An IVA should only be entered into if all other options are unavailable and it is the final stage to stop a person from being declared bankrupt and as such it will have a similarly damaging effect on a person’s credit rating for at least six years.

An IVA is a formal agreement between the borrower and their creditors and is overseen by an insolvency practitioner. Both the borrower and the loan company (or other creditor) agrees to pay a percentage of the debt over a fixed period of time and the borrower is committed to making a single monthly repayment to the IVA company, if these payments are not maintained, the borrower may be declared bankrupt.

Assuming that all the repayments are maintained, after the full term of the IVA (usually 5 years), the borrower is declared free of unsecured debts covered by the IVA, whether the full loan amount has been repaid or not, although they are likely to find it almost impossible to obtain any form of personal loan or other credit for a considerable time after the IVA has finished. As we have previously said, an IVA is the last resort before bankruptcy.

Bankruptcy

Bankruptcy really is the last resort for someone with credit problems, encompassing large loan and credit card debts with arrears and probably defaults and CCJ’s (County Court Judgements) registered against them and will have a severe impact on the borrower’s future credit rating.

Bankruptcy should only be considered when all other possible solutions to the problem have failed. When someone is declared bankrupt, all their assets, including their home and other possessions may be seized in order to repay outstanding debts and they will be unlikely to be able to get any form of loan or credit during the bankruptcy period, which will last for three years.

Even when a bankruptcy has been discharged, it will be difficult to obtain a loan for anything other than minimal amounts. Other assets, such as an inheritance may also be seized to repay debts and someone who has been declared bankrupt will never be able to take a position as a company director, an MP, a Councillor, or be able to work in the finance industry or as an estate agent.

A bankruptcy is a matter of public record and will be published in the local press, so family, friends and any people you have had business dealings with, will be aware of the situation. Bankruptcy is a drastic course of action and should only ever be considered as a last resort.

In Summary

All of the above choices are only intended as a guideline and to provide some basic information on the various options which are available to someone in financial difficulty. Although it is essential to take action sooner rather than later in order to deal with loan debts, it is vitally important not to rush into a particular option without considering the alternatives. A sensible option is to take professional advice from either a financial adviser, debt counsellor, or one of the various financial charities which offer free advice and help, such as the Citizens Advice Bureau, or Credit Action.

Of course, the best solution is to not take on more loans and debt than you are able to manage, not only over a short term, but also for a number of years. Although this is little comfort to someone who is already in a difficult financial situation, for whatever reason, once they have resolved their current financial problems, they should learn from their previous experiences and not fall into the same trap again.