What is the Difference Between Debt Consolidation Loans and Debt Management Plans?
What is a debt consolidation loan? What is a Debt Management Plan? What is the difference between them? Let’s look at these two debt solutions and their pros and cons.
In this article, we'll cover:
In the UK there is a variety of debt solutions available to those who need them. From bankruptcy to IVAs, DMPs and Debt Consolidation Loans, there is something to suit everybody’s situation.
However, due to the multiple options available, it can be hard to know the difference between each solution. Here we have outlined the differences between Debt Consolidation Loans and Debt Management Plans (DMPs) in effort to support you in choosing the right debt repayment method for you.
What is a Debt Consolidation Loan?
Debt Consolidation Loans are a loan that is taken out with the aim of paying off outstanding debts. They allow you to combine all your monthly payments into one, and because of this you would only be required to deal with one creditor.
Many debts can be consolidated using a debt consolidation loan. For example, you could use a debt consolidation loan to pay off credit cards, store cards, catalogue debt, payday loans and mobile phone arrears.
The Advantages and Considerations of Debt Consolidation Loans
There are many advantages of taking out a debt consolidation loan:
- Combining monthly repayments into one that is affordable.
- Reducing the number of creditors, you would need to deal with.
- You will have a better idea of when you could be debt-free.
- Potential to improve your credit score.
However, before you take out a debt consolidation loan it is important to consider that you could end up paying more money than you owe due to interest. Also, this type of debt solution does not support you in overcoming any financial bad habits you may have. There is also a chance that you credit score could be harmed if you continue to miss payments.
Consolidate Your DebtsWhat is a Debt Management Plan?
A Debt Management Plan is an informal agreement with your creditors of an affordable repayment plan for unsecured debts. Often, DMPs can reduce your monthly repayments and make them easier to keep track of.
The Advantages and Considerations of Debt Management Plans
Just like Debt Consolidation Loans, DMPs come with their own range of advantages:
- An affordable monthly repayment plan.
- Interest and charges are usually frozen.
- Less contact with creditors.
- Support in improving your financial behaviour.
When considering a debt management plan is important to recognise that it is an informal debt solution and therefore creditors are not legally obliged to agree or stick to the terms of the plan. Additionally, a DMP would show on your credit file.
What are the differences between Debt Consolidation Loans and DMPs?
Although Debt Consolidation Loans and Debt Management Plans have many similarities, they are completely different types of debt solutions.
In a nutshell, Debt Consolidation Loans involve taking out another loan to repay multiple creditors. Whereas a Debt Management Plan involves looking into your income and your current outgoings to structure an affordable repayment plan from the money you already have.
Looking for further support?
If you are wanting more information about UK debt solutions, or you are looking for further guidance on which debt solution is right for you, we may be able to help you.
Our team of experts are here to help! We can help you to decide if a debt consolidation loan is the right option for your situation. If it, the money will be paid straight into your account!
Apply now to see if you qualify – this initial application will not harm your credit score!
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APRs from 5.8% to 89.9%
We are a broker, not a lender.
Unsecured Loan Representative 69.9% APR
Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.
Secured Representative 11.7% APR
If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.
