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March 28, 2023

Coping with Debt: The Snowball Method vs. The Individual Voluntary Agreement

  • January 21, 2022
  • 4 min read

When paying off debt, you must never walk alone. You need to have a direction so that you know where you’re going and what comes next. To have that direction, you need to look into different debt management strategies. 

A debt management strategy can provide you with the direction you need to pay off your debt and prosper financially. There are multiple debt management strategies. Two of the best ones are the snowball method and the individual voluntary agreement. 

In this article today, I’m going to explain both these debt management methods in detail. This guide will help you pick and choose the perfect strategy for your debt repaying journey. Have a look: 

The Debt Snowball Method 

People who have studied finance or work in a financial institution are well aware of the term ‘the debt snowball method.’ It’s among the most popular debt management strategies that can help you pay multiple debts with ease. 

In the debt snowball method, one targets the smallest debt first and after getting done with it, moves on to the second smallest debt. This method breaks down the entire process for you while providing you with instant gratification. Not to mention, it keeps you motivated throughout your debt repayment journey. 

Pros and Cons of the Debt Snowball Method 

The debt snowball method brings along various merits and demerits for debt repayment. Weighing its pros and cons can help you understand if it’s a suitable method for you. Its implementation is easy as you don’t have to compare the annual percentage rates (APRs) for your debts. Plus, it can keep you motivated. 

The downsides of this method are that it takes a lot of time. You pay the debt as per the balance, so it takes time to reach the top. The second thing is that it leaves the issue of the interest rate unaddressed. As you prioritize debts from the smallest to the largest, the interest rate is often neglected, which creates an issue for you in the end.

The Individual Voluntary Agreement 

The individual voluntary agreement, also known as IVA, is a legally binding, formal agreement between you and your creditor that decides the time, minimum and maximum amount to be paid, and the interest rate. It is usually approved by the court, so your creditor cannot bug you along the way. 

An IVA is set up by a professional, usually an insolvency practitioner. It could be anyone, an accountant, a financial expert, or a lawyer. You can either contact a debt management company and use their insolvency practitioner or talk to your attorney and ask him to do it on your behalf. Either way, it needs to be handled professionally.

Pros and Cons of the Individual Voluntary Agreement 

Like the snowball debt method, the IVA also comes with its own merits and demerits. The best part of the IVA is that you can set up affordable payments for your debt. Plus, since it’s legally binding, your creditor will have to stick to it whether he likes it or not. Not to mention, the interest rate and other charges are often frozen in an IVA. 

The reason many people feel reluctant to go with an IVA is that your privacy is compromised in it. Your lawyer or accountant as well as the debt management company will have to know your entire financial situation before they write the terms for the IVA. Also, it would require you to follow a strict budget as you will have to pay the decided amount every month or there will be legal repercussions.

The Bottom Line… 

Lastly, I’d say you must take everything into account before you decide to go with one of the debt management strategies. The reason being, your debt management strategy can significantly affect your lifestyle until you get done paying the debt off. Good luck, guys!

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