If you are juggling multiple debts and finding the monthly payments difficult to manage, two options come up frequently: a debt management plan and a debt consolidation loan. Both are presented as ways to simplify your debt situation, but they are fundamentally different in how they work, what they cost, and what they do to your credit file. Understanding the difference is important before choosing either.
What is a debt management plan?
A debt management plan, usually called a DMP, is an informal arrangement between you and your creditors, usually managed by a debt charity or an authorised provider. You make one monthly payment to the plan provider, who distributes it to your creditors. Creditors often agree to freeze or reduce interest during a DMP, which means more of your payment reduces the actual debt rather than just servicing the interest.
Free DMPs are available through charities such as StepChange and National Debtline. You do not need to pay for a DMP. There are commercial companies that charge for this service, but there is no reason to use them when free regulated options exist.
What is a debt consolidation loan?
A debt consolidation loan is a new loan, usually a personal loan, used to pay off multiple existing debts. The idea is to replace several monthly payments with one, ideally at a lower interest rate than the debts being cleared. Done well, this can reduce your monthly outgoings and lower the total interest paid over the repayment period.
The key risks are that the new loan may not actually be at a lower rate than your existing debts, particularly if your credit score is poor. Extending the repayment period to reduce monthly payments can result in paying more total interest over time. And some consolidation loans are secured against your home, which means defaulting on the loan puts your property at risk.
How they differ on your credit file
A DMP is likely to show on your credit file and may make it harder to get new credit while it is active. Some creditors may register default notices when you enter a DMP. A consolidation loan, if managed correctly, can be less damaging to your credit file, as it replaces multiple debts with a single new one. But applying for a new loan itself involves a hard search on your credit file, and being declined makes things worse.
Which is more appropriate?
A DMP tends to be more appropriate when your debts are unsecured, you cannot access new credit at a reasonable rate, or your debt level is significant relative to your income. A consolidation loan can work well when your credit score is good enough to access a genuinely lower rate and you are disciplined enough not to use the cleared credit cards again.
If you are struggling with debt, speaking with a free debt adviser at StepChange, National Debtline or Citizens Advice before making any decision is strongly recommended. They can assess your full situation and suggest the most appropriate route.
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Ask Fin provides general guidance only, not regulated debt advice. If you are struggling with debt, please contact a free qualified debt advice service.