Aperture became the second large IVA firm in 2016 to be offering some IVA customers an “early exit loan”. These loans will be provided by Sprout Loans.
This follows the Creditfix/Perinta loans which started in July 2016. My verdict on the Creditfix/Perinta loans was that they are expensive, risky and many people in IVAs should avoid them.
UPDATE: In September 2018 the Insolvency Service considered early exit loans as part of its review of IVA regulation. See IP regulation – Insolvency Service find major problems for my comments on this review.
Who are Sprout Loans?
Sprout Loans is a brand name of Asgard Financial Services Ltd who are authorised by the FCA.
They advertise themselves as “not a boring bank“. A representative APR of 39.9% is quoted, though the interest rates on IVA early exit loans will be lower than that.
Mark Allen is one of the directors of Asgard and a very large shareholder. He is one of Aperture’s Insolvency Practitioners, but he isn’t a director of Aperture and hasn’t taken on any new IVAs for three years. I don’t know if the IPA would regard these loans as a potential conflict of interest for him.
How these Aperture / Sprout IVA early exit loans work
It is being proposed that an unsecured loan from Sprout will be used to offer a final settlement of your IVA. You can’t borrow when you are in an IVA without the permission of your IVA firm, but this loan will only be taken out if your creditors agree to the settlement.
These loans are being suggested to some people who are three years into their IVA. I don’t know what the exact criteria are but the aim is to pick people who have been coping well with the IVA repayments and living on a limited budget. This will include people with a house with equity, who normally have been expected to make an extra year of IVA payments instead of releasing equity.
The loan size will be the total of remaining IVA repayments (including the extra year for people with a house with equity) less a percentage. It is argued – and I agree – that creditors should accept less as they will be getting all the money up front and won’t be exposed to the risk of the IVA failing in the next few years. The size of this reduction will vary. For someone who was due to pay a further £2,400 into their IVA, in the early cases reductions of between £400 and £700 have been agreed by the creditors.
The interest rate on these loans will depend on the individual case but it’s likely to be in the same area as the 29.4% that Perinta are charging. No upfront fees are added.
The term of the loan will usually be three years, or four years for someone with a house with equity.
If you are offered a loan you need to check the exact terms that are proposed.
But let’s look at what a three-year loan at 30% interest could look like for someone at the three-year point, who doesn’t have a house with equity, and who has 24 months of £100 payments remaining:
- if the £2,400 is reduced to £2,000, the loan payments would be £81 a month and the total cost would be c. £2,920. This is £520 more than would be paid if the IVA payments continued at the same amount;
- if the £2,400 is reduced to £1,700, the loan payments would be £69 a month and the total cost would be c. £2,480. This is only £80 more than would be paid if the IVA payments continued at the same amount.
Should you take one of these loans?
These loans are a better option for someone in an IVA than the equivalent Creditfix/Perinta loans because they are shorter and cost less.
But this doesn’t mean that one of these Sprout loans is a good idea for you. There are three main problems with them:
- most people will pay more with an early exit loan than they would by continuing in their IVA;
- you don’t need this loan to improve your credit rating. It is simple and cheap to “clean up” your record when an IVA ends. See Improve your credit score after an IVA for details;
- a loan means you are taking all the risk of any problems in the next three years. If your IVA continues and you have difficulties you can have a payment break or it may be possible to finish your IVA early with no further payments. But with this loan, any late or missed payments will mess up your credit record for a further six years.
People who are finding the IVA payments hard may think an early exit loan is a good idea because of the lower monthly payments. But in this situation it may be dangerous to switch from the IVA to a loan. The loan payments will be cheaper but will go on for longer – you could again be left with unmanageable debt. Instead, if you are struggling with the IVA payments, you should talk to Aperture (or whichever IVA firm you are with) and see if they can be reduced.
The people who may benefit from one of these loans seem to fall into two groups:
- those who are sure they will pay less with the loan because they will expect to get more money over the next two years, for example a promotion, large bonus or a probable inheritance. If you think this is you, I suggest you do some calculations and think how certain something is. For example, if a new, better-paid job goes badly, you may wish you were still in the IVA.
- those who want to sell their house before the IVA ends, perhaps because of a divorce, job move or you need a bigger house. Here the loan may be a good idea but think about your alternatives. Could you agree with your ex to sell the house when the IVA has finished? Rent the house out and rent somewhere else? You won’t be able to get a new mortgage until the IVA marker goes from your credit record, six years after the IVA started – an early exit loan will not change this.
It can be hard to weigh up options involving risk, but don’t underestimate the “safe” option of finishing your IVA as planned. Your IVA was supposed to get you out of debt, not into more debt.