Debt consolidation loan or debt management plan?

Dave Beard

Written by Dave Beard on September 19, 2013

Updated March 29, 2021

debt-consolidation loans

A debt consolidation loan is quite simple a new loan that you take out to pay off your existing debts. To consolidate all of your existing payment (credit cards, overdraft, loans etc) into one larger loan and only one repayment each month.

Why and when should you consider consolidating your debts?

You should consider consolidating if you are struggling to meet the repayments and or if the interest payments for your current debts are high. By consolidating you should be able to save on the cost of repaying your debts, reduce the monthly amount you have to pay and make the process of managing your debt easier.

What are the potential benefits?

A debt consolidation loan should in theory be earlier for you to manage as there is only one payment to meet each and every month. If you have struggled to meet multiple payments at different times of the month with your current arrangement then you may find having just one payment to deal with easier to manage and budget for.

Because you are able to pay off a secured consolidation loan over the long term (up to 25 years) this can then reduce your monthly repayment amount and commitment. Therefore you should find it easier to meet the repayments every month. If you are current debt are at high rates of interest (for example payday loans or expensive credit cards) then you may be able to get a better deal (rate of interest) from your consolidation loan lender and save.

If you pay back your consolidation loan over a long period of time; while this may reduce your monthly repayments each month, the total amount you pay back throughout the duration of the loan may be more.

What is a debt management plan?

A debt management plan is used for those who have multiple creditors (money they owe money too) and is designed to enable the debtor to pay what they owe under a set plan and course of action. You make one monthly payment to the DMP (debt management plan) and they then distribute this payment to your multiple creditors upon your behalf.

What are the benefits of a DMP – debt management plan?

A DMP will stop your creditors hassling you about what you owe, they will in most cases freeze your interest payments, you’ll be making a monthly repayment that you can afford (at a reduce rate) and you’ll only be paying what you can afford to pay after your essential living costs have been taken into consideration.

However it is worth noting that unlike a debt consolidation loan a debt management plan will negatively affect your credit rating. This is because although you are making some payments towards your debts, you are paying less that you originally agreed and have not meet the original terms of your loans. Consolidating your debt however is simply changing one form of debt or loan to another and also long as you maintain all of your repayments then taking out a consolidation loan is likely to have a positive effect on your credit rating.

We can help consolidate your existing debts

Through our panel of secured lenders our loan brokers can help to arrange a debt consolidation loan. By providing us with some basic information on yourself, your home, your employment status and credit history this enables us to search against our lenders loan criteria to find you a suitable loan for the amount you require.

Your existing debts – what do we need to know?

We’ll also require information on your current debt commitments and the total amount you owe (the outstanding balance). We can then use this information to get you the right size of loan that is big enough to clear and pay off your current debts in full. You may need to speak to your current individual lenders to obtain a redemption figure – this is the final payment amount they require to pay off the debt in full and includes both the capital payment and interest due.

We can help if you have a poor credit history, have CCJ’s or defaulted on payments in the past.

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