How a Recession Affects Debt Consolidation

Is a debt consolidation loan the number one solution for me? Being in a recession (according to the Ernst & Young ITEM Club Autumn forecast), there’s a real need for individuals with debt problems to realise what is different between debt consolidation loans and the various other financial solutions available - and see which one might be the best solution for their circumstances.

To start, it rely’s upon what happens in the future. In a recession, the chances are for it to be bad news - when consumer spending lowers and businesses make a loss, many firms will make people redundant as a means to stay afloat. For any person who’s pretty sure their company might be laying off staff, consolidating their debts may not be a good idea.

Why? One of debt consolidation’s best benefits is the opportunity to reduce an individual’s monthly debt repayments. A debt consolidation loan is most effective when the persons financial situation is fairly stable: when they are aware how much they are earning and how much they’re spending every month, they can then work out the number one way of repaying their debt.

So someone facing the prospect of unemployment would perhaps be better off looking into debt management, instead of debt consolidation. Debt management gives a flexible approach to debt: borrowers are able to ask debt management professionals to talk to their creditors on their behalf, asking them to think about allowing lower monthly payments, waive charges and/or freeze interest.

Individual Voluntary Arrangements require a high level of commitment and can require homeowners to release some of the cash in their home. Borrowers are required to commit to making fixed monthly payments for (most of the time) six years, based on the maximum they are able to afford when they’ve taken their must have monthly costs into account. Even so, an Individual Voluntary Arrangement could make an important difference - for people whose debts have gradually got out of control, including people facing a sudden fall in their earnings. Granted, Individual Voluntary Arrangements do need a level of financial stability: if the individual doesn’t feel they could commit to five years of regular payments, an IVA might not be the best debt solution for them.

Find out more about debt consolidation, IVAs & debt management.