Informal debt solutions decoded

Informal Debt Solutions don’t fall under the Bankruptcy Act 1966 and are an updated arrangement (often with your current creditors) in order to get yourself back on track to meet your repayments. It’s still important to understand the pros and cons of each, however entering into one of these arrangements won’t impact your credit report or score. These options, unfortunately, aren’t always available and will depend on your current financial position, meaning that a formal debt solution may be your only choice.

INFORMAL DEBT SOLUTIONS

A Debt Consolidation Loan involves taking out one loan to pay multiple debts.

If you’re paying a lower rate of interest your likely to have a longer period

Pros:

• One payment instead of multiple payments.
• You may have a lower interest rate.
• Repayments may be lower (due to extended payment period).
• Can make it easier to budget and/or make payments.

Cons:

• Depending on the terms, you could end up paying more interest over the life of the loan, which could get you deeper in debt.
• The term could increase and you may end up paying more interest because of this.
• You may not be approved if you’re insolvent. This could also negatively affect your credit report.

A Debt Settlement is when you make an offer to your creditors that is less than the full amount you owe in order to wipe out your debt completely.

Pros:

• You can settle the debt for less than the full amount.
• Clears your debt with one payment.
• Could save you thousands in interest.
• You can avoid bankruptcy and the ongoing effects of bankruptcy.

Cons:

• A debt settlement stays on your credit report for up to seven years.
• If you owe more than one creditor, you have to go through the process with each one.
• Lenders are not obligated to accept debt settlement offers.
• You may need to pay fees to a debt settlement company to negotiate for you.

Creditor Negotiation means changing the terms of your current loans to make them more manageable and affordable.

Pros:

• You may get a lower interest rate and lower payments.
• You may be able to freeze repayments until you get back on your feet.
• You may be able to extend the length of the loan to reduce repayments.
• Set up a payment plan, even if the creditor is demanding a lump sum.

Cons:

• Your credit score may be negatively affected.
• It may take you longer to get out of debt.
• It can be hard to prove to your creditor that you’re a candidate for this solution.
• It can also be difficult to negotiate with your creditor without the help of a professional (this and you may not be approved.

A moratorium is when you put your repayments on hold for up to 12 months.

Pros:

• Gives you time to get back on your feet financially.
• You may be able to freeze interest for the period of the moratorium.

Cons:

• Interest may still incur even if you are not making repayments whilst the moratorium.
• It will increase the amount of time you are in debt.

If you’re struggling with debt, find out more about our debt solutions or contact us to find out how we may be able to help you.