Debt consolidation vs debt management plan: what’s the difference?

Content

• What is debt consolidation?
• What is a debt management plan?
• Debt consolidation vs DMP: key differences
• When to consider debt consolidation
• When to consider a DMP
• Risks & benefits
• How to compare your options
• FAQs

Debt consolidation and Debt Management Plans (DMPs) are two ways to manage multiple debts.

With debt consolidation, you take out new credit, such as a loan or credit card, to pay off existing debts. Debt consolidation is more commonly used by people who can still access affordable credit.

A DMP is an informal arrangement where you make reduced payments towards your existing unsecured debts based on what you can afford. A DMP is more commonly used when normal repayments have become difficult to manage, and getting affordable new credit is unlikely.

Both options work differently and can affect your monthly payments, credit file and total repayment costs. The most suitable option depends on your individual circumstances.

What is debt consolidation?

Debt consolidation means combining several debts into one new credit agreement.

This can include:

• a debt consolidation loan
• a balance transfer credit card
• a secured loan, where borrowing is linked to an asset such as your home

The idea is that the new credit pays off some or all of your existing debts. You then make one monthly payment to the new lender.

For example, someone may use a debt consolidation loan to repay several credit cards, loans or overdrafts. Instead of paying each lender separately, they repay the new loan each month.

Debt consolidation doesn’t remove the debt. It changes how the debt is arranged.

The cost will depend on:

• the amount borrowed
• the interest rate
• the repayment term
• any fees or charges
• whether the borrowing is secured or unsecured

You can use our debt consolidation calculator to estimate how much a debt consolidation loan could cost.

A lower monthly payment may feel easier to manage. But if the repayment term is longer, you may pay more overall.

What is a debt management plan?

A Debt Management Plan, or DMP, is an informal arrangement between you and your creditors, the people you owe money to.

Unsecured debts are debts that are not linked to an asset, such as:

• credit cards
• personal loans
• overdrafts
• store cards
• catalogue debts
• payday loans
• Buy Now, Pay Later
• debts with debt collection agencies

With a DMP, you make one monthly payment based on what you can afford after essential living costs. This payment is then shared between your creditors.

A DMP can be arranged by you directly with creditors, or through a debt management provider like MoneyPlus.

A DMP doesn’t usually reduce the amount you owe. You remain responsible for repaying the full debt unless a creditor agrees otherwise.

Creditors may agree to freeze interest and charges, but they don’t have to. They may also still contact you or take further action.

Because a DMP is informal, it’s more flexible than some formal debt solutions and is not legally binding.

Debt consolidation vs DMP: key differences

Debt consolidation and DMPs can both help someone manage multiple debts, but they are not the same.

Area	Debt consolidation	Debt Management Plan
How it works	Uses new credit to repay existing debts	Arranges reduced payments to existing creditors
New borrowing	Usually involves new borrowing	Doesn’t usually involve new borrowing
Monthly payments	One payment to the new lender	One payment shared between creditors
Affordability	Based on the new lender’s terms	Based on what you can afford after essential costs
Interest	Depends on the new credit agreement	Creditors may freeze interest, but this is not guaranteed
Credit file	May affect your credit file if you apply or miss payments	Likely to affect your credit file because you pay less than agreed
Creditor agreement	Existing creditors are paid off if the consolidation loan is completed	Informal arrangement so creditors don’t have to accept the DMP
Total cost	Could be lower or higher depending on the interest rate, fees and repayment term of the new credit. A longer term may increase the total amount repaid.	You usually repay the full debt over time. The total amount repaid may increase if interest and charges continue or if fees are paid to a provider.
Flexibility	Depends on the credit agreement	Can often be reviewed if your circumstances change
Main risk	Taking on unaffordable or longer-term borrowing	Creditors can still add interest, charges or take action

When to consider debt consolidation

Debt consolidation might be right for you if:

• you can afford the new monthly payment
• you can access credit at an affordable rate (if your credit history is limited or affected, you can read more about debt consolidation and bad credit)
• you’re still making your current payments
• you have not already missed payments
• the new payment is realistic within your monthly budget
• you’re confident you will not build up more debt after consolidating

Debt consolidation may feel simpler because it brings payments together. But it’s still borrowing.

It may not be suitable if the new credit has a high interest rate, if the repayment term is much longer, or if the monthly payment is still unaffordable.

It’s also important to be careful with secured borrowing. If you use a secured loan to consolidate unsecured debts, you may be putting an asset, such as your home, at risk if payments are missed.

When to consider a DMP

A DMP might be right for you if:

• your current payments are no longer affordable
• you have money left after essential costs, but not enough to meet all debt payments
• most of your debts are unsecured
• you understand that creditors don’t have to accept reduced payments
• you understand your credit rating is likely to be affected

A DMP can make payments more manageable because the amount is based on what you can afford. However, it isn’t a formal legal solution.

Creditors can still contact you and may still add interest and charges. Some creditors may reduce or stop interest and charges if you keep up with your DMP payments, but this isn’t guaranteed.

A DMP can also take longer to repay because monthly payments are reduced.

Risks and benefits

It’s important to look at the full picture when comparing debt consolidation with a DMP.

Risks of debt consolidation

Debt consolidation may:

• increase the total amount you repay if the term is longer
• cost more if the interest rate is high
• be harder to access if your credit file has already been affected
• lead to more debt if you continue using the old credit accounts
• affect your credit file if you miss payments
• put your home or other asset at risk if the borrowing is secured

A lower monthly payment doesn’t always mean a cheaper option overall. Always check the total amount repayable.

Benefits of debt consolidation

Debt consolidation may:

• combine multiple debt repayments into one monthly payment
• make repayments easier to keep track of
• reduce interest costs in some cases, depending on the credit agreement
• provide a fixed repayment term in some arrangements

Risks of a Debt Management Plan

A DMP may:

• affect your credit rating
• take longer to repay than your original agreements
• mean you repay the full debt over time
• not stop all creditor contact
• not guarantee frozen interest or charges
• not stop creditors from taking further action
• include fees if you use a fee-charging provider

A DMP can help make payments more affordable, but it doesn’t guarantee a specific outcome with creditors.

Benefits of a Debt Management Plan

A DMP may:

• reduce monthly payments based on what you can afford
• help you prioritise essential household costs
• simplify payments by combining debts into one monthly payment
• lead to interest and charges being frozen, although this is not guaranteed

How to compare your options

Before comparing debt consolidation vs debt management plan options, it can help to ask a few simple questions.

Can you afford your current payments?

If you can afford your current payments, debt consolidation may be one option to explore. But you should still check the total cost.

If you can’t afford your current payments, taking out more credit may not be suitable. A DMP or another debt solution may need to be considered.

Are you already behind on payments?

If you have already missed payments, you may find it harder to get affordable consolidation credit.

Missed payments can also mean your creditors are already taking action. In this situation, getting debt advice may help you understand your options.

Would new borrowing cost more overall?

A consolidation loan may reduce your monthly payments, but it could increase the total amount you repay.

Check:

• the interest rate
• the loan term
• any arrangement fees
• the total amount repayable
• whether the borrowing is secured or unsecured

Would reduced payments help you manage essentials?

If your debt payments leave you short for rent, mortgage, food, energy or council tax, you may need a solution based on affordability.

A DMP looks at what you can afford after essential costs. But priority debts must be considered carefully.

Priority debts include things like:

• rent or mortgage arrears
• council tax arrears
• gas and electricity arrears
• court fines
• child maintenance arrears

These can have serious consequences if unpaid, so they should be dealt with first.

Have you had regulated debt advice?

Debt advice can help you understand which options may be available based on your situation.

This can be especially helpful if you’re unsure whether you need budgeting support, a DMP, an IVA, a Debt Relief Order, bankruptcy or another option.

Getting debt advice before deciding

If you’re unsure which option could suit your situation, debt advice can help you understand your choices.

A debt adviser can look at:

• your income
• your essential spending
• your debts
• your creditors
• any arrears
• your assets
• your wider circumstances

They can then explain which debt repayment options in the UK may be available to you. This doesn’t mean you have to choose a particular solution. It simply helps you understand the options based on your circumstances.

FAQs 

Debt consolidation vs Debt Management Plan (DMP) frequently asked questions.

What to do next

Debt consolidation and DMPs are two different ways to manage debt.

Both come with risks, costs and limitations, and the most suitable option depends on your circumstances.

If you’re unsure what to do next, MoneyPlus can help you understand your options. We can review your situation and explain which options may be available. There’s no obligation to take action, and support is available when you’re ready.