Consolidation is the act of combining several debts into one and making a single regular repayment to cover them. There are several ways to consolidate debts and repay them. Which is the best depends on factors like personal preference and type of debt. If you are in debt, explore these to find a way to free yourself from it.
If credit card balances represent the full amount of the debt and the accounts are not in default, a lower interest credit card or a credit card with a zero interest balance transfer may be a consolidation option.
With zero interest balance transfer card, a debtor can transfer balances from all other credit cards and repay these without any interest accumulating during a specified period.
A lower interest card reduces interest charges that accumulate while debt is being repaid. With either approach, balances should be repaid as soon as possible.
Some Recognised Options Are:
A debt consolidation loan is used to repay several existing debts. This loan typically has a lower interest rate and longer repayment term than those of the existing debts, making it more affordable. After existing debts are repaid with the loan funds, the loan holder makes regular installment payments toward the consolidation loan. This is an excellent way to prevent interest, late fees, and other charges from accumulating on existing debts.
A debt management plan is a revised agreement between a debtor and creditors for full repayment of debts. A debt management company typically administers the plan, negotiating repayment arrangements with creditors.
With a debt management plan, the debtor makes a single monthly payment designed to cover all included debts. The debt management company receives this payment and allocates the appropriate amount to each covered creditor. Creditors may agree to freeze interest and other debt charges while the plan is in place.
An Individual Voluntary Arrangement (IVA) is a similar solution but it is considered a formal agreement and may not require repayment of debts in full. A licensed Insolvency Practitioner (IP) negotiates debt repayment with each creditor and the debtor makes a single monthly payment that covers all repayments. The IP then provides each creditor with the amount agreed upon in the IVA.
Once each creditor has received the balance agreed to during IVA establishment, the IVA ends and the covered debts are considered paid in full, even though the agreed balances may be less than the balances of the original debts.
Interest and other charges are usually frozen while the IVA is in place and possibly during its establishment. The extended repayment period and potential reduced debt repayment make this agreement affordable to many consumers.
Whether consumers should consolidate their debts with a lower interest credit card, zero interest balance transfer credit card, debt consolidation loan, debt management plan, or IVA depends on their personal financial situation and other factors.
The best debt consolidation option is suitable for the type of debt that exists and makes repayment affordable. If you are in debt, get additional free information and advice from groups like Debt Advice Foundation and the National Debtline.