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What is the difference between a debt consolidation loan, a debt management plan and an IVA?

If you’re looking to tackle your debt, there are a number of options available to you. These range from simple debt consolidation to more formal solutions such as a debt management plan or an Individual Voluntary Arrangement.

But, what is the difference between these various debt solutions? And what are their pros and cons? We answer these questions and more.

A debt consolidation loan

One of the most common ways that people tackle their debts is through a debt consolidation loan. Indeed, a report from the Office of Fair Trading states that ‘debt consolidation appears to be the single most important reason given by consumers for obtaining a loan’.

If you have unsecure debts such as credit cards, overdrafts, personal loans or store cards you will probably be paying high rates of interest. Credit Action found that UK consumers paid a total of £172 million in interest charges every single day in May 2012.

Debt consolidation loans let you borrow a lump sum in order to repay your other smaller debts. They typically attract lower interest rates than other debts and so will save you money. You will often also find that a single monthly payment to a debt consolidation loan will be lower than the combined payments you were making to your other debts, helping your cashflow.

You can organise and apply for a debt consolidation loan without help from a third party. And, it doesn’t generally affect your credit rating.

A debt management plan

A debt management plan involves you reducing the amount you pay every month in order to take control of your finances. However, it differs from a debt consolidation loan in several key ways.

Firstly, a debt management plan is provided by a specialist company. They negotiate with your creditors on your behalf in order to try to get them to accept lower repayments and freeze any further interest that might otherwise be added to your current debt.

You then make one payment to your debt management plan and the provider splits the payment between your various creditors. The amount that you pay is worked out by taking into account all your income and your outgoings to make sure that your payment is affordable to you.

As you are reducing the amount that you pay to your creditors, entering into a debt management plan will affect your credit rating. It may also take you longer to clear your debt and you will often find that you pay fees of anything up to 20 per cent to the debt management plan provider.


Individual Voluntary Agreements (IVAs) are becoming increasingly popular in the UK. An IVA is a legally binding contract between you and your creditors. The aim of an IVA is to reach an agreement with creditors to reduce your monthly repayments, stop any legal action and, most importantly, to avoid having to apply for a bankruptcy order.

In order to obtain an Individual Voluntary Arrangement you must appoint a qualified ‘insolvency practitioner’ (IP) to act for you. Once you have appointed an IP an application to court is made for an ‘interim order’. This stops your creditors from proceeding with a bankruptcy petition or taking other court action. Your insolvency practitioner explains your situation to the court and your creditors decide whether to accept your proposals.

IVAs allow you to get into a position where you can afford the monthly repayments. They also have fixed terms of typically three to five years so you know when you will be debt free. However, you normally have to have debt of around £15,000 to be eligible for an IVA and your income will be regularly monitored during the IVA period to make sure you are paying as much as you can.

Another major disadvantage of an IVA is that it will be held on your credit file for up to six years. This will significantly affect your ability to obtain credit in the future including mortgages, loans and credit cards.

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