Debt Consolidation Loan or Debt Management Plan

If you are juggling several debts and wondering whether to consolidate them into one loan or set up a debt management plan, the two work in opposite directions. A debt consolidation loan is new borrowing: you take out a loan and use it to pay off your existing debts in full, then repay the loan instead of your credit cards¹. A debt management plan (DMP) does not involve new credit at all. You make one affordable monthly payment that is shared among your creditors, who usually agree to accept smaller amounts based on what you can afford².

The choice matters because the risks are different. A consolidation loan can lower your monthly payment and give you a single repayment with a known end date, but it can also mean paying more overall, and if it is secured against your home, that home is at risk if you fall behind³. A DMP can make your debts more manageable without new borrowing, but it is not legally binding, not all creditors will freeze interest, and it can affect your credit rating⁴.

Just over one in four personal loan borrowers use their loan for debt consolidation or to pay off other debt, according to official statistics from May 2022⁵. Around 70% of the people StepChange Debt Charity helps have a credit card debt⁶. Whichever route you are considering, free and impartial debt advice is available before you commit to anything⁷.

What each option actually does

A debt consolidation loan lets you combine several debts into one, often with lower interest and easier payments¹⁰. You pay off your creditors with money you borrow, then make monthly payments to pay off the loan instead of your credit cards¹. The advantages can include paying a lower rate of interest, lower monthly payments, a known end date, a single monthly payment, dealing with only one lender, and avoiding a bad credit rating from missed payments³. After consolidating you only have one monthly repayment to make to the loan lender, which can make budgeting easier to manage¹¹.

A debt management plan is a debt solution that lets you make affordable payments to your debts¹². It is an agreement between you and the people you owe where you make an affordable monthly payment that is shared among your debts². The main difference from consolidation is that DMPs do not involve taking out further credit. Instead, creditors usually agree you can make smaller payments based on what you can afford, and interest and charges may be frozen if creditors agree¹. A DMP mainly covers non-priority debts such as loans, credit cards, overdrafts and store cards¹³. Priority debts, such as mortgages and other secured debts, are not covered by a debt management plan and are usually paid separately¹⁴.

The two are not the only options. Other debt solutions include individual voluntary arrangements (IVAs), bankruptcy, debt relief orders (DROs), and the Debt Arrangement Scheme in Scotland¹⁵. In Scotland, it will usually be better to use the Debt Arrangement Scheme instead of having a DMP¹⁶.

Fees, charges and eligibility

The costs of the two routes are structured differently. With a consolidation loan, interest and charges are added to your repayments¹⁷. There may be other charges like set-up fees or early repayment fees¹¹. The added interest may not be cheaper than you are paying now¹¹, and interest could be higher than what you are paying now¹⁷.

With a DMP, some companies charge a fee while others give their services for free¹⁴. Fee-charging DMPs typically take between 10% and 15% of your monthly payment as a management fee⁴. Free providers such as StepChange Debt Charity offer DMPs with no set-up charges or monthly fees⁶. Whether you choose a free or fee-charging DMP, you need to consider how it could affect your credit rating, how much debt you have to repay, and how long it will take to repay¹⁸.

Eligibility also differs. Generally, consolidation loans should only be considered by people with good credit histories and a relatively high proportion of high interest debt, such as store and credit cards¹⁹. For a DMP, you typically need two or more debts to different providers²⁰. The loan itself will typically be unsecured if you are borrowing less than £5,000 or secured against your home if you want to borrow more⁸.

A balance transfer moves the debt, not the interest rate

One of the risks of consolidation is that the new loan's interest rate may not actually be lower than what you are paying. The added interest may not be cheaper than you are paying now¹¹, and interest could be higher than what you are paying now¹⁷. The payments could be bigger or last longer, and you might end up paying more overall¹⁰.

A longer repayment period is the quiet trap. Longer-term consolidation loans may be better value than short-term borrowing in terms of the monthly payment, but stretching the term means more interest paid in total³. The Financial Conduct Authority's rules require firms to take account of the costs associated with increasing the period over which a debt is to be repaid, whether it is appropriate to secure a previously unsecured loan, and whether negotiating an arrangement with creditors would be appropriate where there are payment difficulties²¹.

Debt consolidation is rarely the solution to a serious debt problem, because in practice the borrower is simply increasing their debt¹⁹. If you are already struggling to make minimum payments, adding a new loan on top can make things worse rather than better.

How a DMP works in practice

A DMP is managed by companies known as debt management plan operators or providers, who negotiate with creditors and manage payments¹⁴. The plan can be administered by yourself, a registered debt charity, or a commercial debt management company²³. A DMP works in a similar way to reduced payments but the charity does all the work, and is sometimes a better solution than reduced payments²⁴.

Starting a debt management plan means making a new promise to repay your debts in full¹⁴. All of your debt will need to be paid back, unlike some other solutions¹³. Repayments can be flexible if your circumstances change¹⁷, and the plan is reviewed whenever your situation changes²⁵. If you make big changes online, your provider may need to follow up with a call²⁶.

There are limits. A DMP is not legally binding, not all creditors will freeze interest, the payback period increases, all creditors must agree separately, and fees increase debts⁴. Some creditors may not agree to the plan for some customers²⁷. Not all debts can be included in management solutions¹⁷. Using credit during a DMP is against the terms and can result in it being closed²⁸.

Opening a plan or taking out a loan

Before entering into a debt management plan, it is important to speak with an impartial debt advisor who will help explain the costs and repayment duration⁷. The provider should discuss all the possible options available to you to deal with your debt problem¹⁴. Suggesting a debtor change from a debt management plan to a debt arrangement scheme is a form of debt counselling, which is advice that steers the debtor in the direction of a different debt solution²⁹.

For a consolidation loan, the process is a standard credit application. The lender will assess your credit history and affordability. If you have a poor credit history, you may not be offered a loan at all, or you may be offered one at a higher rate.

If you are in Scotland, the Debt Arrangement Scheme is usually a better route than a DMP¹⁶. In Northern Ireland, debt repayment options include DMPs and other solutions³⁰.

Service and complaints

If you have a problem with a debt management plan provider or a lender, you can complain. The Financial Ombudsman Service handled 49 complaints about debt counselling, including debt management plans, in the first quarter of 2026/27³¹. The ombudsman can look at complaints involving cost of living issues³² and complaints about unaffordable lending³³.

If you are unhappy with how a firm has treated you, you can complain to the firm first, then escalate to the Financial Ombudsman Service if you are not satisfied. The service is free to consumers.

StepChange Debt Charity has helped more than seven million people and has more than 30 years' experience³⁴. More than 22,000 people have rated it 4.9/5 on Feefo⁶. It is regulated by the Financial Conduct Authority³⁴.

Protection for your money

Debt advice itself is not covered by the Financial Services Compensation Scheme³⁵. However, money held by StepChange while a DMP is being administered is covered by the Financial Services Compensation Scheme, so you can get compensation if StepChange is unable to meet its financial obligations³⁶. The client money reconciliation process must show a shortfall in the amount of client money the firm held for you for a claim to be considered³⁵.

For consolidation loans, protection depends on the type of loan. Unsecured loans are not protected by the FSCS in the same way as deposits, but you have rights under the Consumer Credit Act and can complain to the Financial Ombudsman Service. If a loan is secured against your home, the risk is to your home, not to a protected deposit.

Credit unions are an alternative source of borrowing for people who cannot access mainstream credit. Credit unions are not for profit community lenders providing affordable loans and savings, with loans starting from £50, and loans and savings are protected by the Financial Services Compensation Scheme³⁷. They provide access to fair and affordable credit for people with a poor credit history³⁷. You need to have a 'common bond' to open an account with a credit union, such as working for a particular employer or living in a specified geographical area³⁸. Anyone in the house of a person with a 'common bond' can usually join³⁹.

If you are struggling with debt, free and impartial debt advice is available from StepChange Debt Charity, which offers free, flexible debt advice based on a comprehensive assessment of your situation⁴⁰. You can also get help from Citizens Advice and other debt advice charities.