Debt consolidation loan or IVA?

A debt consolidation loan is used to pay off multiple existing debts, such as loans, overdrafts and credit cards. The aim is to simplify your debts by combining them into a single monthly payment.

But taking on more credit if you’re already struggling with debt may not always be a good idea.

An IVA is a legally binding agreement between you and your creditors. It allows you to pay back your debts, usually over five or six years, at an affordable monthly rate. Any remaining debt is written off at the end of the IVA.

Duration

IVA - An IVA usually lasts five or six years.

Debt consolidation loan – The duration depends on the specific loan, but they tend to last between one to eight years.

Fees

IVA - There are always fees for an IVA but they can vary quite a bit between companies. If you get an IVA from our trusted partner, they will only charge a fee if your IVA is accepted by your creditors. These fees are paid out of – not on top of – your regular, affordable IVA payments. Read more about individual voluntary arrangement fees.  

Debt consolidation loan – There can be a range of different fees including:

• origination fee: lenders may charge you for processing your loan application, usually between 1% to 5% of the loan amount
• late payment fee: missing a payment can lead to hefty late fees 
• prepayment penalties: some loans come with penalties if you pay them off early so always check the terms before signing 

Lender contact

IVA - Lenders can’t contact you to pay debts included in your IVA or take you to court as long as you stick to the terms and conditions of your IVA.

Debt consolidation loan - Your original lenders shouldn’t contact you after you’ve consolidated your debts as you’ll have paid what you owe. If you miss payments or default on your consolidation loan, your new lender will contact you about it and, if you don’t catch up, they may eventually take legal action.

Interest and charges

IVA - interest and charges on your debts will be put on hold as long as you stick to the terms and conditions of your IVA.

Debt consolidation loan – interest is charged on debt consolidation loans and although the rate may be lower than on your original debts, if it takes you longer to pay off your debts, you may end up paying more interest overall. 

Public register

IVA - Your details will be listed on the public insolvency register until three months after your IVA finishes.

Debt consolidation loan - Your details won't appear on the public insolvency register if you take out a debt consolidation loan.

Debt write off

IVA - After you successfully finish your IVA – typically in five or six years – any remaining unsecured debt covered by the IVA will be written off.

Debt consolidation loan – There is no debt write-off with a debt consolidation loan. 

Home

IVA

For homeowners

You won’t have to sell your home but you may need to make your IVA payments for up to an extra 12 months, or remortgage to release equity from your property to pay into your IVA. 

For renters

Generally, an IVA shouldn’t affect your tenancy. However, some private landlords might include a clause in the tenancy agreement that could require you to leave if you take out an insolvency solution. Check your tenancy agreement before you make a decision on whether to go ahead with an IVA. 

Debt consolidation loan 

For homeowners

If you’ve taken out a secured debt consolidation loan and you miss payments and can’t pay it back, the provider could take and sell your property.

For renters

You won’t be able to secure a consolidation loan against your home if you’re renting so it shouldn’t affect your tenancy.

Car

IVA – You’ll usually be able to keep your car, as long as its value isn’t too high.

Debt consolidation loan - If you’ve secured your loan against your car, it could be at risk if you miss payments.

Job

IVA - For the majority, an IVA won’t impact their job. But it might be an issue in specific professions e.g. if you’re a solicitor or an accountant. Check your employment contract before taking out an IVA.  

Debt consolidation loan - Your job won’t be affected by a debt consolidation loan. 

Credit file

IVA - An IVA will remain on your credit file for six years from the date it’s agreed. Your credit score will be negatively affected by an IVA.

Debt consolidation loan – A debt consolidation loan shouldn’t affect your credit score as long as you keep up with your payments. If you miss any payments, this will show on your credit file.

A debt consolidation loan may be suitable if you can afford your debt repayments but you want to combine them into a single monthly payment. 

An IVA may be better if you can’t afford your current monthly debt repayments and want to reduce the amount you pay and have some of your debt written off.

Before making a decision though, it’s always best to get free debt advice.