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What's the difference between an IVA and debt consolidation?

If you know a few things about insolvency solutions, there's every chance you will have heard of an IVA - an Individual Voluntary Arrangement.

An IVA is a legally binding insolvency solution, designed to help struggling borrowers in England, Wales and Northern Ireland who have significant unsecured debts they can't afford to pay back over a reasonable period.

However, you may have also heard an IVA referred to as a type of debt consolidation. This is because an IVA would basically combine multiple debt payments and roll them into one - giving you a single payment to make per month, rather than several.

Having said that, an IVA is a very different approach to a debt consolidation loan. Here we'll look at exactly how an IVA and a debt consolidation loan compare.

IVA & debt consolidation loan: who are they for?

Do you have a sizeable amount of unsecured debt - e.g. on credit cards, catalogues or personal loans - that you don't think you can repay in a realistic amount of time? If you answer 'yes', an IVA could let you repay what you can safely afford (taking your essential outgoings into account) - and write off the debt you can't afford to repay when it successfully ends.

You can see you if you might qualify for an IVA here.

On the other hand, you may be comfortably affording your debts every month - but want a way of simplifying your finances and/or taking some pressure off your monthly budget. If this applies to you, you could take out a loan and use it to pay off all your current debts in one go. So a debt consolidation loan could replace multiple debts and monthly payments with just one - and give you some flexibility in terms of how fast you arrange to repay the loan.

IVA & debt consolidation loan: how do they work?

If you enter an IVA (which requires lenders holding 75% or more of the total debt value to agree to it), you will:

• Make one reduced payment per month, which fits around your essential costs (such as your rent/mortgage, food and important bills)

• Stop further demands from your lenders

• Have any remaining debt included in your IVA written off once it successfully ends.

An IVA will damage your credit rating for six years and, if you're a homeowner, you may be required to release some equity.

You can find out more about how an IVA works on this page.

A debt consolidation loan, however, works very differently. If you take one out, you will:

• Replace multiple monthly payments with a single one

• Only have one lender to deal with

• Be able to arrange monthly payments you can afford.

Bear in mind that a debt consolidation loan could only be suitable if you can afford to repay the loan in full with regular payments - and it could end up costing you more overall if you repay the loan over a longer timeframe (due to interest). And bear in mind that securing any debt against property could put your home at risk if you don't make the repayments.

IVA or debt consolidation loan: which is right for me?

Choosing the best approach to your debts may seem daunting. But getting some professional advice could help you to make the right decision.

We can call you back free of charge and explain your options to you.

By Daniel Culpan.

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Subject to eligibility and acceptance. Fees Payable. Debt write off applies to unsecured debts only and on completion of an IVA, alternative solutions may be offered. If your IVA fails, it could lead to Bankruptcy. Your ability to obtain credit will be affected for at least 6 years. Homeowners may be required to release the equity in their property.