Debt Consolidation Loan vs IVA: What’s the Difference and Which Could Suit You?

You may struggle to repay debts due to serious circumstances like unemployment, business loss, high cost of living, etc. Under this condition, you must be exploring the best ways to get out of debt or get advice regarding debt payments. Debt consolidation loans and IVA (Individual Voluntary Arrangements) are two major ways of managing debt better.

Debt consolidation is a process of merging different debts into a single payment.  Alternatively, IVA (Individual Voluntary Arrangement is an insolvency procedure set between an insolvency practitioner and creditors.  It allows you to pay only what you can afford over a fixed period. Afterwards, any remaining debt is written off.

However, choosing the right debt management tool depends on the type of debt, the amount you owe, the seriousness, and how much you can repay. The blog lists clear differences between debt consolidation loans and IVAs. It may help you choose the right option accordingly.

What is a debt consolidation loan?

A debt consolidation loan helps you repay multiple debts at once by consolidating them. You can merge debts like rent, credit cards, payday loans, personal loans, etc., into a single monthly instalment. It may help you repay a lower amount per month at a lower interest rate.  It eventually reduces liabilities on a loan. Instead, it helps you save money on total payments.

A debt consolidation loan in the UK can be secured or unsecured, depending on your needs. The interest rates generally stay competitive given the long-term loan. It is advisable to choose high-interest debts first to consolidate. It will prove more beneficial and help you streamline finances better.  

What do you mean by Individual Voluntary Arrangement (IVA)?

Individual Voluntary Arrangement is basically an insolvency procedure.  It involves a practitioner and creditors.  The practitioner discusses the outstanding amount on the borrower’s behalf with creditors. It therefore helps the creditor, practitioner, and the borrower determine how much one can pay on a particular debt. Accordingly, the borrower may get the new terms and the repayment amount.

You generally need to clear the dues within 6 years. Afterwards, the remaining debt is written off. However, to qualify for IVAs, you must owe at least £6000 to one or more creditors. You must have a regular income that helps the solicitor determine how much you can repay.

Unlike debt consolidation, you can write off a substantial portion of a debt with an IVA. However, no outcome is fixed.

Debt consolidation loan Vs. Individual Voluntary Arrangement: Debt written off

Under a debt consolidation loan, the debt does not get written off. Instead, you pay a reduced amount per month than the previous payment schedule. It helps you save money and the hassle of dealing with different creditors and payments every month. By the end of the loan term, your credit score improves, and so does your debt-to-income ratio. It may help you qualify for better interest rates and terms later.

Yes, you can get debts written off with an Individual Voluntary Arrangement, as it is an insolvency procedure. You pay only what you can, given the financial circumstances. The respective loan practitioner decides the amount by discussing it with the lenders. You must repay this amount within 6 years of the arrangement.  Any remaining payments afterwards are written off.

Debt consolidation loan Vs. Individual Voluntary Arrangement: Credit score impact

Making a new application means you need to undergo soft and hard credit assessments. The soft credit check does not impact your credit score. However, the hard credit check remains on your profile for over 12-24 months. It helps the lender determine the actual affordability and the amount you must get on a loan.

Whereas under IVA, the arrangement lasts on your credit report for 6 years from the date you get one. It affects your credit score and the probability of getting loans and credit cards at cheaper interest rates and flexible terms until that period.

Debt consolidation loan Vs. Individual Voluntary Arrangement: Credit score needs

You need to have a good credit score to get a debt consolidation loan. It helps the lender confirm you can afford the new payments without defaulting. Whether you need a secured or an unsecured debt consolidation loan, a good credit history is a must.

If your recent credit behaviour has improved and your income has grown, you may qualify for an affordable loan.  Alternatively, you may try a secured loan if you want to get good interest rates with a bad credit score. It involves staking up an asset, and you may get a loan amount according to the requirement and the asset value.  

Alternatively, individuals undergoing an insolvency procedure may lack a good credit score. Therefore, one does not need to have a good credit rating to qualify for a loan. This is because one does not have enough to pay the bills and the credit.

Debt consolidation loan Vs. Individual Voluntary Arrangement: Duration

A debt consolidation loan generally lasts for 2-10 years, depending on the loan amount, repayment term, and the loan type. If you continue to repay the dues consistently for the entire loan term, your credit history and score improve. Missing or defaulting on the loan may lead to additional liabilities and high-interest liabilities.

Individual Voluntary Arrangement last for about 6 years. Remaining debt payments are written off after that. It means the IVA remains on your credit profile for 6 years and impacts the ability to get affordable loans.

Debt consolidation loan Vs. Individual Voluntary Arrangement: Risks

Here are some risks of debt consolidation loan:

• Secured loans may risk your home
• The interest rates are high on these loans
• Debt consolidation does not resolve the financial problem completely
• Eligibility can be restrictive
• Fees and early repayment charges

Here are some risks of IVA:

• You risk losing your property and other valuable assets
• Your credit score may be severely impacted
• You cannot borrow over £500 on any loan
• You may need to pay to the practitioner for the insolvency proceedings. The fees may reach to £5000

Bottom line

Choosing the right aspects between a debt consolidation loan and IVA requires detailed analysis of your finances, the risk you can take, and the flexibility you seek. Debt consolidation is ideal if you are undergoing temporary financial difficulty and cannot repay debts on time.  Alternatively, IVA is ideal if you cannot repay the dues anymore.