Bank Loans and Payday Loans in an IVA
An IVA is designed to tackle all types of unsecured debt, including loans. Until recently, most people would have had their personal loans provided by their high street bank, but over the last 5 years there has been a significant rise in payday loan companies.
Most people turn to their bank to provide a loan of large value, spread over a long term whereas, typically, they would turn to a payday loan company for a loan of a few hundred pounds or so to be paid back within a few weeks.
These two different styles of loan can both be included in an IVA, but there will be a difference between how an IVA treats these two types of loan.
How an IVA Deals with Bank Loans
When a personal bank loan is to be included in an IVA, the bank is invited to submit their claim for the money they're still owed by the IVA applicant. This amount is known as the 'Outstanding balance' and can usually be calculated by multiplying the contractual monthly loan payment by the amount of monthly payment still left to be paid in the original agreement.
This figure will differ from a personal loans 'Settlement figure', which is the amount often quoted by the bank needed to bring a loan to an early settlement via a lump sum payment.
The lender will naturally prefer to claim the outstanding balance through the IVA as it usually is a much larger amount than the settlement figure. This means that the bank will rescue more money through the IVA because their claim will be increased by the higher outstanding debt.
This, though, has a minimal impact on the IVA applicant, as there would only be a relatively modest increase in the IVA contribution as a result of the higher debt. As a general rule, high street banks recognise a small percentage of their client base will encounter difficulties with their personal finances, and when this happens they will, in most cases take a pragmatic approach and search for an amicable solution such as an IVA.
How an IVA Deals with Payday Loans
Payday loans are somewhat different from personal bank loans in the sense that they tend to offer loans over a much shorter term.
Payday loans tend to provide people with emergency credit, where there is an immediate short term need for a relatively small sum for just a few weeks.
Because of the nature of payday loans and, of course, in order for the loan company to make a healthy profit, the interest rates on payday loans are comparatively high in order to create high returns over the short loan period.
But this means that if the loan cannot be repaid within the agreed term, the interest can easily spiral out of control. It is mainly for this reason that people with payday loans seek debt help through an IVA, as an IVA has the ability to legally freeze the interest on the loan from the outset.
Some payday loan companies can be less pragmatic than their high street banking cousins when it comes to IVAs, but most recognise that an IVA will provide a better financial return than bankruptcy and will, therefore, accept an IVA on its own merits.
Applying for an IVA
If you are struggling with maintaining your personal loan payments, whichever type you have, then you should speak to an adviser as soon as possible. Call 0800 856 8569 where one of our IVA specialists will be waiting to take your call.