What happens if you feel your debt is getting on top of you and you want some help? It’s not that you’re not bringing money into your household – it’s just the amount you’re paying out every month to service your debt means that you’re not happy with the amount of cash you have left in your bank account at the end of the month once everyone you need to pay off has been paid off?
You might be able to choose between a debt settlement arrangement and a debt consolidation loan. In this article, Loan Broker looks at the difference between the two.
What is a debt settlement?
A debt settlement plan, known by a few different names, is a type of arrangement you make with your creditors to pay off some or all of your debts.
You can set up a debt management plan. Debt management plans are provided by debt management companies (which must be registered with the Financial Conduct Authority). If you can only afford to pay a little bit each month to your creditors or you need a few months’ grace to recover financially (from losing your job, for example), the debt management company contacts your creditors and divides the money you pay to them between your creditors. A debt management company charges you for setting up the arrangement and for handling the payments to creditors each month. Please note that debt management plans can’t be used if you’ll fall behind on your mortgage.
If a creditor has taken you to court and you have a judgment of against for less than £5,000, you can make small monthly payments to the court to pay them off. The creditor or creditors receiving the money cannot take any more court action against you unless they have the permission of the court.
Debt relief orders are available if you owe less than £20,000, you don’t own any property, and you don’t have much disposable income (that’s what’s left after all of your bill payments come out at the end of the month). Your creditors can not chase you anymore without the permission of the court and, after 12 months, you’ll be discharged from the order meaning that you don’t owe any money anymore to your creditors.
Debt arrangement schemes are available in Scotland – click here for more.
Effect on your credit score of debt settlement arrangements
All of the arrangements listed above will be present for any potential lenders you approach to see on your credit report for up to six years after the start of the arrangements. Although the short-term pressure on you will be greatly alleviated with an arrangement in place, your ability to secure further credit (including mortgages) may be severely impaired.
What is debt consolidation?
Taking out a debt consolidation loan is a completely different approach to handling your money when it appears that you might be verging on losing control of the situation. Most people taking out a debt consolidation loan will have a number of different loans, credit cards, and store cards. On some or all of them, the amount a person will have taken out (their “balance”) might be very close to the amount they’re allowed to take out (their “limit”).
Why is this a problem? Not only will multiple payments come out of a person’s bank account every month, but they’ll also come out at different times of the month meaning that it’s difficult to know just how much has to be in your account at any one time. A greater problem might be the cost of that credit – we all know how expensive the interest rates on loans, credit cards, and store cards can be.
A debt consolidation loan is a loan you take out to pay off all of the balances on each account in one go. The interest rate on a debt consolidation loan is often much smaller than you’ll be paying on individual loans, credit cards, and store cards. That means it can cost you a lot less using loans for debt consolidation to pay down and pay off your debt than by juggling all of those different loans, credit cards, and store cards.
There’s another big benefit too. Store cards and credit cards are what are known as “revolving” forms of credit. That means unless you pay them off, they will roll on month after month after month. When you take out a loan for debt consolidation, there is a finishing date – a date on which all of your debts will be settled. It might be in three years’ time or in five years’ time but there is an end date.
There is a great example of this on MoneySavingExpert. The site tells the story of a credit card customer on a fairly standard credit card interest rate of 17.9% who owes £3,000 on his credit card. He only has to pay back 1% of the balance every month or £5, whichever is more. It would take this customer more than 27 years to pay off his balance in full, paying back the £3,000 he’s borrowed and over £4,000 in interest.
As you can see, that’s why debt consolidation loans can serve a real purpose. The interest rate, in many cases, will be a lot lower than what you’re paying to your credit card company and you’ll pay it off when your debt consolidation loan ends, not in 27 years’ time!
Debt consolidation loans via Loan Broker
To apply for a debt consolidation loans, contact Loan Broker. We don’t lend you the money – what we do is connect you with the debt consolidation loan providers which are most likely to want to lend money to you based upon your credit history and your current financial situation.
Once we’ve heard back from each of the lenders (this normally happens within a few seconds), we will come up with the very best debt consolidation loan deal we’ve found. Then, it’s up to you – if you’re happy with the loan, read the terms and conditions, and sign the online paperwork. There’s no obligation on you to take out the loan we’ve found for you and our service is always free.
To start your application for debt consolidation loans, please click here.