Debt consolidation guide

Free, Impartial Debt Advice StepChange Debt Charity Debt consolidation guide

Contents

Introduction How this guide will help you 3

Section 1 Debt consolidation loans 4 ­• What­is­debt­consolidation? ­• Is­debt­consolidation­right­for­you? ­• Secured­and­unsecured­debt­consolidation ­• Can­you­afford­a­debt­consolidation­loan? ­• After­a­debt­consolidation­loan

Section 2 Other debt solutions 7 ­• Debt­management­plan ­• Individual­voluntary­arrangement ­• Debt­relief­order ­• Bankruptcy

Section 3 Our debt help 9 ­• How­we­can­help ­• How­to­contact­StepChange­Debt­Charity StepChange Debt Charity Debt consolidation guide

Introduction

How this guide will help you At­StepChange­Debt­Charity,­we­help­people with­problem­debt­by­giving­free,­impartial debt­help.

Although­debt­consolidation­companies­often promote­their­services­as­the­best­way­to­manage debts,­there­are­many­different­ways­to­get­out­of financial­difficulty,­and­debt­consolidation­is­not always­the­best­solution­for­everyone.

This­guide­explains:

•­What­debt­consolidation­is •­If­consolidation­is­right­for­you •­What­other­solutions­are­available •­How­we­can­help­with­your­debt­problem •­how­you­can­contact­us

As­this­guide­will­explain,­you­must­always­think carefully­before­taking­out­a­debt­consolation­loan,­as it­could­make­your­situation­worse­rather­than­better. Free anonymous debt advice Free­debt­help­online­from­StepChange­Debt For­more­advice­about­your­debt­problem,­contact­us, Charity­at­ www.stepchange.org or­use­our­online­StepChange­DebtRemedy­tool.

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Debt consolidation loans

What is debt consolidation? Bigger­monthly­payments­and­longer­loans You­may­have­to­make­a­large­payment­to­your­debt Debt­consolidation­is­the­name­for­a­loan consolidation­loan­each­month,­or­you­could­find­that that­you­use­to­pay­off­all­your­other you­are­paying­the­money­back­for­a­long­period. unsecured­debts. If­you’re­applying­for­any­kind­of­loan­you­should A­debt­consolidation­loan­can­be­taken­out­to­pay always­check­how­much­the­payments­are­each debts­such­as­credit­cards­and­store­cards, month,­and­how­many­payments­you­will­need­to catalogues­and­personal­loans. make­over­the­lifetime­of­the­loan.

Taking­out­a­debt­consolidation­loan­means­that­ Debt­consolidation­fees you­will­only­have­to­make­one­monthly­payment­ rather­than­several­monthly­payments­to­cover­your Some­debt­consolidation­loan­companies­charge debts.­This­can­make­it­easier­for­you­to­manage­your arrangement­fees­and­these­will­be­added­to­the finances­and,­in­theory,­makes­keeping­up­with­your money­you­are­borrowing,­therefore­increasing­the payments­simpler. amount­and­possibly­the­term­of­your­loan.

Debt­consolidation­is­not­the­best­solution­for If­you­are­thinking­about­taking­out­a­debt everyone.­Taking­out­a­debt­consolidation­loan­could consolidation­loan­it­is­very­important­that­you leave­you­in­a­worse­financial­situation­than­you­are consider­all­of­these­things,­and­carefully­check­the currently­in.­Please­think­carefully­before­taking­out terms­and­conditions. a­debt­consolidation­loan. The­Government­and­the­Money­Advice­Service­have more­information­about­debt­consolidation­loans­on Is debt consolidation right their­websites.­Visit­ www.gov.uk or for you? www.moneyadviceservice.org.uk Although­debt­consolidation­can­help­some people,­for­others,­it­can­create­even­bigger debt­problems.

For­many­people,­payments­to­a­debt­consolidation loan­can­work­out­more­expensive.

Higher­interest­rates

It­is­important­to­remember­that­if­you­have­debt,­or­if you­have­missed­payments­on­your­debts,­this­will have­affected­your­credit­rating.­You­will­usually­find that­the­only­way­you­can­borrow­more­money­is­at­a higher­interest­rate.­If­you­have­to­borrow­money­at­a higher­interest­rate­you­will­pay­more­money­back over­the­lifetime­(or­term)­of­the­loan.

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Debt consolidation loans

information­on­other­ways­of­dealing­with­your­debt Secured and unsecured problems,­­please­contact­us,­or­use­our­online debt consolidation StepChange­Debt­Remedy­tool. There­are­two­types­of­debt­consolidation loans­–­secured­and­unsecured. Free anonymous debt advice Secured­and­unsecured­loans­have­different Free­debt­help­online­from­StepChange­Debt consequences­for­your­finances­and­it­is­very Charity­at­ www.stepchange.org important­that­you­understand­the­differences between­the­two.

Secured­loans

A­secured­loan­is­when­a­debt­is­secured­against your­property.­Taking­out­a­secured­loan­is­like taking­out­another­mortgage.­If­you­cannot­pay­the loan­back,­the­loan­company­can­sell­your­property. We­would­never­recommend­that­you­take­out­a secured­loan­to­pay­back­your­unsecured­debts.

A­secured­loan­is­usually­cheaper­than­an­unsecured loan,­because­lenders­know­that­they­can­sell­your assets­if­you­do­not­pay­the­money­back.­As­there­is less­risk­to­lenders,­they­are­usually­able­to­offer lower­interest­rates­for­secured­loans.

But­a­secured­loan­is­much­more­risky­for­you.­You never­know­how­your­circumstances­might­change­in the­future­and­you­could­be­putting­your­home­at­risk with­a­secured­loan.

Unsecured­loans

An­unsecured­loan­is­also­known­as­a­personal­loan. If­you’re­struggling­with­your­finances­and­you­don’t keep­up­with­your­repayments,­your­credit­rating­will be­affected,­but­the­loan­company­will­not­be­able­to repossess­your­home.

In­these­circumstances,­you­may­be­able­to­reach­an agreement­with­the­lender­for­them­to­accept­lower payments­or­refinance­your­loan­over­a­longer­period. For­more­advice­about­consolidation­loans­and

5 StepChange Debt Charity Debt consolidation guide

Debt consolidation loans

Can you afford a debt After a debt consolidation loan consolidation loan? If­you­do­decide­on­a­debt­consolidation loan,­make­sure­that­you­use­it­to­pay­off­all Taking­out­a­debt­consolidation­loan­is­not your­debt­for­good. the­best­solution­for­everyone. You­are­most­likely­considering­a­debt­consolidation If­you­do­decide­to­take­out­a­debt­consolidation loan­because­you­cannot­afford­to­pay­the­monthly loan,­you­will­only­have­one­company­to­pay­back repayments­on­the­debts­you­have­at­the­moment. each­month.­However,­you­may­be­making­large payments­to­that­company­every­month­and­over­a If­you­decide­to­take­out­a­debt­consolidation­loan, long­period­of­time. always­pay­your­existing­debts­off­in­full.­Cut­up­all your­credit­cards­and­cancel­the­agreement­in If­you’re­struggling­to­pay­the­debts­you­have­at­the writing,­otherwise­you­might­be­tempted­to­borrow moment,­you­may­not­be­able­to­afford­the­payments more­money. to­a­debt­consolidation­loan.­Look­at­your­income­ and­expenditure­to­see­what­money­you­have Be­aware­that­if­you­do­borrow­more­money­after available­­and­make­sure­that­you­can­comfortably consolidating­everything­into­one­debt,­you­will­have afford­the­repayments. an­even­bigger­debt­problem­than­you­started­with. If­you­can’t­afford­the­payments,­you­will­end­up struggling­even­more­in­the­future.­To­find­out­what other­options­are­available­to­you,­get­in­touch­with­ Free debt advice us­today. Free­debt­help­from­StepChange­Debt­Charity call­ 0800 138 1111

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Other debt solutions

If­you­are­having­difficulty­paying­back­your How­can­we­help? debts,­there­may­be­a­better­solution­for­you than­getting­a­debt­consolidation­loan. Unlike­fee-charging­debt­management­companies, our­services­are­completely­free­and­we­don’t­charge Everyone’s­circumstances­are­different,­and­what you­for­arranging­and­managing­your­debt works­for­some­people,­won’t­necessarily­work­best management­plan.­That­means­everything­you­pay for­you.­We­can­help­you­to­identify­your­best­way will­go­towards­reducing­your­debts. forward.­Our­online­StepChange­Debt­Remedy­tool, will­assess­your­finances­and­recommend­the­right The­key­to­the­success­of­any­debt­management­plan debt­solution­for­you. is­that­you­only­pay­what­you­can­afford­and,­as­your situation­improves,­you­pay­the­debt­off­as­soon­as This­section­of­the­guide­will­take­you­through­some you­can. of­these­solutions.­It­will­look­at: If­we­arrange­a­DMP­for­you­we­will­make­sure­you •­Debt­management­plans have­a­reasonable­amount­of­money­to­live­on,­so that­you­can­keep­up­with­all­your­household­bills, •­Individual­voluntary­arrangements while­clearing­your­debts­as­quickly­as­possible. •­Debt­relief­orders Please­note­that­a­DMP­will­take­longer­to­repay •­Bankruptcy debts­and­charges­may­increase­the­total­debt.­The DMP­will­also­impact­on­your­credit­file. Debt management plan Who­is­it­for?

A­debt­management­plan,­or­DMP,­is­for­those­who have­some­money­left­over­at­the­end­of­each­month, but­not­enough­to­pay­all­their­debts.

How­does­it­work?

A­third­party­will­normally­arrange­a­debt management­plan­for­you­–­this­could­be­a­charity like­us,­or­a­debt­management­company.­The organisation­arranging­your­DMP­will­draw­up­a proposal­for­your­creditors,­which­asks­them­to accept­reduced­payments.­They­will­also­ask­for interest­and­any­charges­to­be­stopped.

Free anonymous debt advice Free­debt­help­online­from­StepChange­Debt Charity­at­ www.stepchange.org

7 StepChange Debt Charity Debt consolidation guide

Other debt solutions

Individual voluntary How­can­we­help? StepChange­Debt­Remedy,­our­online­tool,­will­be arrangement able­to­tell­you­if­an­IVA­is­the­best­solution­for­you. Who­is­it­for? Should­you­decide­to­go­ahead,­StepChange Voluntary­Arrangements,­our­IVA­service,­will­support you­throughout.­You­may­also­contact­your­own­IVA An­individual­voluntary­arrangement,­or­IVA,­is­a­legal provider­if­you­wish. process­for­those­with­unsecured­debts­in­England, Wales­or­Northern­Ireland.­If­you­live­in­Scotland­you can­apply­for­a­PTD,­please­see­our­wensite­for Debt relief order details. Who­is­it­for? How­does­it­work? A­debt­relief­order,­or­DRO,­is­a­legal­procedure.­To An­IVA­is­arranged­by­an­insolvency­practitioner.­Your qualify­for­a­debt­relief­order­you­must­have­debts­of insolvency­practitioner­will­help­and­advise­you less­than­£20,000­(from­2014/15)­in­total­and­no­more throughout­the­process.­They­will­assess­your than­£50­left­over­each­month­after­paying­essential finances­and­draw­up­a­proposal­for­your­creditors. living­costs. With­an­IVA,­your­available­income­is­used­to­make affordable­monthly­payments­towards­your­debt­over A­debt­relief­order­is­not­suitable­for­anyone­who an­agreed­period­of­time­–­usually­5­years.­ owns­a­home­or­has­assets­of­more­than­£1,000 (from­2014/15).­This­limit­excludes­one­car­up­to­the You­may­also­pay­a­lump­sum­towards­your­debts.­At value­of­£1,000.­Only­available­in­England,­Wales­and the­end­of­the­agreed­period,­your­remaining­debts Northern­Ireland.­If­you­live­in­Scotland,­please­see are­written­off.­There­is­a­fee­involved­in­organising our­website. the­IVA,­but­this­will­be­included­in­the­payments you­make.­Creditors­representing­at­least­75%­of How­does­it­work? your­total­debt­must­vote­in­favour­of­the­IVA­for­it­to be­able­to­go­ahead.­When­your­creditors­agree­to An­intermediary­must­submit­your­DRO­application­ the­IVA­they­are­also­agreeing­to­take­no­further­legal to­the­official­receiver.­You­will­have­to­pay­a­fee­of action­against­you­to­recover­the­debt,­providing­you £90,­which­you­will­not­get­back­if­your­application­ keep­to­the­terms­of­the­arrangement. is­unsuccessful.

Your­insolvency­practitioner­will­contact­you­once­a If­your­DRO­application­is­successful,­your­debts­will year­to­review­your­finances.­You­and­your­creditors be­written­off­after­a­year,­providing­you­keep­to­the will­receive­annual­progress­reports­and­you­will­be terms­and­conditions­of­the­order.­During­this­12- notified­when­your­IVA­is­complete. month­period,­your­creditors­cannot­chase­you­for payments.­Please­note­your­DRO­will­appear­on­the Please­note­an­IVA­appears­on­the­public­register public­register­and­impact­your­credit­file. and­will­impact­on­your­credit­file,­there­is­also­a­risk of­bankruptcy­if­it­fails.You­will­need­to­live­on­a How­can­we­help? restricted­budget­during­the­IVA. We­are­one­of­the­few­approved­organisations­able­to submit­your­debt­relief­order­application.­We­have­a team­of­intermediaries­who­can­help­you­with­your DRO­application. 8 StepChange Debt Charity Debt consolidation guide

Debt solutions

Bankruptcy We­can­provide­you­with­free,­confidential­debt advice­and­find­the­best­debt­solution­for­your Who­is­it­for? situation.­We­can­advise­you­more­on­bankruptcy­if you­use­our­online­tool,­Debt­Remedy,­which­will Bankruptcy­is­a­legal­procedure­for­people­who advise­if­bankruptcy­is­the­best­option­for­you. cannot­pay­their­debts­within­a­reasonable­time.­It’s­a form­of­insolvency­so­to­be­eligible,­your­unsecured debts­must­outweigh­your­assets,­including­property and­vehicles.

How­does­it­work?

If­you­make­yourself­bankrupt,­creditors­write­off­your unsecured­debts,­meaning­you­have­a­fresh­start. However,­you­will­be­subject­to­certain­restrictions during­the­term­of­the­bankruptcy,­which­is­usually­ 12­months.

In­order­to­file­for­bankruptcy,­you­have­to­pay­a deposit­of­£525­plus­court­fees.­If­the­bankruptcy­is approved,­creditors­must­stop­charging­interest­and are­prevented­from­contacting­you­or­taking­legal action­to­recover­ the­debt.­

In­some­cases,­you­are­asked­to­make­monthly payments­towards­your­debts­from­your­available income.­This­is­known­as­an­Income­Payment Arrangement,­and­can­last­for­three­years.

Bankruptcy­should­not­be­taken­lightly­as­it­is­a­big step­and­you­may­have­to­give­up­your­assets.­You should­always­get­expert­advice­before­making­the decision­to­go­ahead­with­it.

Bankruptcy­may­impact­your­job­and­seriously­affect your­credit­rating.

How­can­we­help?

Free anonymous debt advice Free­debt­help­online­from­StepChange­Debt Charity­at­ www.stepchange.org

9 StepChange Debt Charity Debt consolidation guide

Our debt help

We­know­debt­and­understand­that­debt problems­can­be­very­stressful. Contact us Our­StepChange­Debt­Remedy­tool­is­free However­big­or­small­your­debt­problem­is,­we­can and­confidential,­giving­you­online­debt­help, help­you.­We­will­give­you­all­the­information­and support­that­you­need­to­tackle­it­and­take­the­first advice­and­support­when­you­need­it­most. step­towards­getting­debt­free. If­you­would­prefer­to­talk­to­someone­in­confidence, First­steps call­our­free­Helpline­on­0800­138­1111­to­arrange a­telephone­appointment. The­sooner­you­start­to­deal­with­your­problem,­the better.­It­is­important­that­you­get­in­touch­with­us straight­away.­Also,­put­a­stop­to­any­more­borrowing: Free anonymous debt advice •­Don’t­take­out­any­more­loans Free­debt­help­online­from­StepChange­Debt •­Don’t­increase­your­overdraft Charity­at­www.stepchange.org •­Stop­using­your­credit­cards­and­cut­them­up •­Don’t­consolidate­your­debts­into­one­loan •­Don’t­secure­any­loans­against­your­home

How we can help

If ­you­are­worried­about­your­debts,­make sure­you­get­expert­debt­help­straight­away.

We­provide­free,­impartial­and­confidential­debt advice­that­will­help­you­through­your­financial difficulties.­We­help­thousands­of ­people­each­year and­we­will­be­able­to­give­you­the­debt­help­ you­need.

Our­online­StepChange­Debt­Remedy­tool­will recommend­a­solution­for­you­based­on­your­unique situation.­StepChange­Debt­Remedy­will­also build­you­a­personal­action­plan,­so­you­can­see exactly­where­your­money­is­going­each­month,­and begin­to­take­control­of ­your­spending­again.

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