Consolidation and the credit crunch
In the credit crunch, it’s more likely than usual to be bad news – when consumer spending decreases and companies lose money, many businesses are forced to make people redundant just so they can keep afloat. For anyone thinks their company is considering about making redundancies, a debt consolidation loan might not be a great idea.
One of the most attractive benefits of consolidating debt is its ability to reduce an individual’s monthly repayments. A debt consolidation loan is most effective when the individual 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 calculate the best way of repaying their creditors.
With a stable income, the debtor can calculate how much they can afford each month, and arrange to repay the consolidation loan at the correct speed – not too slowly (unnecessarily postponing the day they’re debt free, and increasing the amount of interest they’ll pay) and not too quickly.
So someone facing the prospect of being out of work could be better off looking into debt management, rather than a debt consolidation loan. DMPs offer a flexible approach to debt: borrowers can ask debt management advisers to negotiate with their creditors on their behalf, asking them to agree with more flexible repayment terms.
Debt management 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 redundancy isn’t always the only threat. 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 IVA (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. 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.
