Consolidation Loan or Debt plan? Weigh up the options

With the explosion of credit demand has come a range of new tools and terminology. Some new initiatives have also been introduced to help consumers understand the complexity of the products and services they are being offered and new legislation to make it easier to enforce terms or avoid unscrupulous lender actions.

No matter what the changes, the basics of credit management remain the same as they have over all time. Lenders look to extend credit in return for the repayment of capital with interest over a fixed period. Failure to make payments involves the lender chasing debtors and enforcing the remedies that exist within the documents that evidence the borrowing.

Lenders do not like defaulting customers. They are expensive to administer and may lead to a loss of capital. That means that their bad debt provisions have to be increased and other performing loans have to underwrite the losses. Therefore, it is always a fine balance between nurturing, cajoling and strict enforcement leading to repossession or court action. Much of the decision on the route to follow depends on the approach and actions of the borrower. Willing, compliant and helpful customers that show intent through action will always get more leeway than those that seek to avoid, ignore or frustrate.

So what are the options once you start to experience problems with keeping up with you payments?

It may be that you have a number of different types of borrowing that, collectively, are a struggle to keep on top of. This may be more noticeable if you have experienced a reduction in income caused by a loss of job, reduced hours or other reasons. However caused, before you start to default on payments you may wish to consider a debt consolidation loan. A debt consolidation loan is one where you apply for a new loan and use the proceeds to pay off all or most of your other, more expensive borrowings. Care needs to be taken when deciding which loans to repay since it may be expensive to settle some loans that have short periods to run or high cancellation fees. Where consolidation loans can work well is with clearing credit or store card debt that have turned into hard core borrowing and other more expensive loans. Interest free or low rate loans should be retained since it would be pointless replacing these with a higher rated debt consolidation loan. The only time it may be worthwhile repaying these early is to spread the capital payment over a longer term. This can ease the pressure on the monthly budget although you will pay a premium in terms of interest cost for the privilege. This, though, may be worthwhile in some situations.

If considering a debt consolidation loan then you must apply before you start to default on any of your obligations. Once your credit history starts to record missed payments, lenders will be wary and look to charge a premium or look for other security or credit enhancements such as guarantors.

An alternative route to consider is a debt management plan. This is an informal arrangement with your lenders to reduce the monthly payment in return for a fee and a longer time to repay. It may be that you just seek a reduction in payment for a short period and can make up the missed amounts by overpaying later. Either way, agreement from your lender in advance is essential so as to avoid unnecessary harassment and entries on your credit history.

Debt management plans involve you taking the initiative and talking to your lenders about a change in repayments. Some may not be comfortable with this process and, if you have a number of loans that you want to defer, it can be time consuming and difficult keeping on top of all the different requirements. You may, therefore, consider using the services of a debt management company or an insolvency practitioner to help you through the process. They have both the experience and contacts to understand what is achievable and how to present a plan to lenders in a way that is likely to be approved. You may have to pay a fee for this service (usually as part of the revised monthly plan payments agreed) but it can save time and get a better result than doing it yourself if there are a number of lenders involved.

In reality, it may be a combination of a debt consolidation loan and a debt management plan that gets you onto a better footing. Reducing your debt to a manageable monthly amount and getting a better handle on how you plan your debt can be a good combination for success.