UK unsecured personal debt, such as unsecured loans, credit card debt and personal overdrafts, currently stands at a massive 0.7 trillion. This mountain of unsecured personal debt has reduced disposable income and made it difficult for people to cover their household bills.
Should someone tackle their money problems with a bad credit unsecured loan or a debt solution, such as a debt management plan, personal bankruptcy or an Individual Voluntary Arrangement? How will this affect someone’s credit rating?
Bad Credit Unsecured Loans vs. Debt Solutions
Deciding whether a debt solution or a bad credit unsecured loan should be chosen will depend heavily on a person’s credit rating. Whilst those with good credit can usually get a debt consolidation loan at 8-9%, this isn’t the case for those with bad credit.
Missed or late payments and loan default means that bad credit customers represent a huge risk to lenders. Bad credit unsecured loans charge an APR of about 50-60%. A high APR bad credit unsecured loan will only serve to worsen money problems and should be avoided in favour of a debt solution.
Debt solutions can be utilised to fit unsecured loans, credit card debt and personal overdrafts around household bills. The decision someone with personal debts needs to make is whether they wish to manage debt with a debt management plan or write off debt with an Individual Voluntary Arrangement or personal bankruptcy.
Why Choose a Debt Management Plan?
A debt management plan is a voluntary agreement between a debtor and his creditors. It involves making a payment of at least £100 to an intermediary who, in turn, disseminates the proceeds to creditors on a pro rata basis. Although a debt management plan doesn’t write off debt, it can result in interest and further charges being frozen. It is normally suitable for debts of up to £15,000.
Why Choose an Individual Voluntary Arrangement?
Unlike a debt management plan, an Individual Voluntary Arrangement is a legally binding agreement with creditors for debts of over £15,000. Once 75% of creditors, in terms of value, agree to an IVA there can be no further creditor harassment. The debtor will need to make 60 monthly payments to an Insolvency Practitioner. Once this has been done the remaining unsecured personal debt is written-off.
Why Choose Personal Bankruptcy?
Personal bankruptcy is a debt solution used to deal with serious personal debts. It is possible to write off debt of most varieties, but not taxes, child support, student loans and money accrued as a result of fraud. Most debtors will be discharged after a period of 12 months, although there are a number of negatives, including loss of the family home.
Should someone struggling with high APR personal debt and bad credit be experiencing money problems, it is sensible to pursue a debt solution. Before deciding whether an Individual Voluntary Arrangement or debt management plan is the right option, it is advisable to consult a debt counsellor to discuss the situation.