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A debt consolidation loan is a new loan you use to repay your existing debts in full, meaning that you will only have to make one payment each month instead of many. As well as simplifying your finances, it can also enable you to reduce your monthly outgoings by spreading out the loan repayments over a longer period than your original debts. However, as with any debt solution, there are some other things to consider. You should only take out a debt consolidation loan if you are sure you can meet the repayments. Also consider that spreading out your repayments may result in you paying more interest overall - although many people will accept this so long as their month-to-month costs are lower. Best for: people with relatively manageable debts who would like to reduce their monthly outgoings and/or simplify their finances. Debt Management Plan A debt management plan is an informal arrangement that involves asking your creditors to accept lower monthly payments towards your debts. It may also be possible to negotiate a reduction or freeze in interest and other charges, which can prevent your debt from growing. It's possible to arrange a debt management plan on your own, but it can be time-consuming and stressful. A lot of people prefer to let a debt management organisation negotiate with their lenders on their behalf. The downside of a debt management plan is that making lower monthly payments will mean the debt could take longer to repay - and if you don't get a reduction on the interest rate, you could end up paying more interest, too. Plus, it will have a negative effect on your credit report. Best for: people who can no longer afford their debt repayments, but would be able to repay their debts in full over a longer period of time. IVA (Individual Voluntary Arrangement) An IVA is a formal, legally binding agreement with your creditors in which you will repay as much as your debt as possible (based on how much you can afford) and write off the rest. While only paying a percentage of your debts may appear to be an 'easy way out' at first, that is not the case. An IVA would require you to put as much as you can afford towards your debts each month, and this will usually continue for five years. If your income increases during your IVA, you may be required to give up some of this to put towards your debts, and if you are a homeowner, you may also be required to release some of the equity in your home in the 54th month (half way through the final year) of the IVA. That said, an IVA is widely considered a preferable alternative to bankruptcy for many people, as it is extremely unlikely to force the sale of your home and does not put so many restrictions on your future credit activity (although the presence of an IVA on your credit history in itself may make obtaining credit more difficult for one year after it comes to a conclusion). Best for: people who cannot see themselves ever repaying their debts in full, who can't keep up with repayments to their unsecured debts, who can commit to making regular reduced payments, and for whom bankruptcy is not appropriate.
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