Debt management plans and loans

Debt management plans are designed to give you another option to help repay the money you owe in an informal but controlled agreement. If you can afford your everyday living expenses but are finding it challenging to keep up with credit and loan repayments, a debt management plan could help you break down your monthly costs.

Read on to learn more about how debt management plans work, what you can use them for, and the potential risks involved. From how it might affect your credit report, to whether you can still get a loan while on a debt management plan, we’ll help you understand the key factors and considerations.

In this guide:

• What is a debt management plan?
• How does a debt management plan work? 
• Will a debt management plan impact my credit report? 
• Can I get a loan while on a debt management plan?
• Can I get a mortgage on a DMP?
• Can I get a car loan while on a debt management plan?
• How to get a debt management plan
• Is a debt management plan right for me?
• How Moneyboat can help

What is a debt management plan?

A debt management plan (DMP) is an agreement between you and your creditors or lenders (the organisations you owe money to) to help you make your repayments. If you can’t afford your current repayment terms, a DMP can help you negotiate smaller and more affordable repayments over a longer period of time.

Debt management plans are usually offered by third-party organisations such as:

• Debt charities, such as StepChange
• Debt management companies

Do most creditors accept debt management plans?

Unfortunately, you’re not always guaranteed to be able to set up a debt management plan with your creditor or lender. While some lenders may accept a debt management plan if they believe it’s the best solution for receiving the money you owe them, they’re not legally obligated to. There are various potential reasons why lenders might refuse a DMP, such as:

• They don’t agree with the plan as a long-term solution to resolving your debt
• They don’t approve of the debt management company (for example, if it’s a for-profit agency)
• They believe you can afford to make the repayments
• You’re not budgeting your discretionary income appropriately to meet the repayments

If they refuse, you may need to speak with the creditor or lender yourself to negotiate an alternative repayment solution. If you do, simply explain your circumstances and be honest about what you can afford per month.

You can learn more about the difference between discretionary and disposable income with our helpful disposable income guide.

How does a debt management plan work?

Debt management plans can help you pay off the money you owe by combining your debts into a single monthly payment. DMP providers will sit down with you and discuss your budget, then send payments to your creditors on your behalf. Your DMP will keep track of what you owe and help break down your repayments into smaller ‘partial repayments’ until you pay off your debts entirely.

On average, a debt management plan can last between three and five years, though it’s not uncommon for them to last up to 10 years too.

When you begin a debt management plan with third-party debt charities, the third-party charity or organisation can help support you through each step of the process. However, it’s important to understand what they can and can’t help pay off.

Which debts can I pay off with a debt management plan?

You can only use debt management plans to help pay off ‘non-priority’ debt, such as:

• Bank loans
• Credit cards
• Student loans
• Water bills
• Benefits overpayments

What debts are not included in a debt management plan?

Unfortunately, you can’t arrange a debt management plan to help you repay ‘priority’ debts, such as:

• Mortgage arrears
• Rent arrears
• Gas and electricity arrears
• Magistrates’ court fines
• Ex-partner and child maintenance service (CMS) arrears
• Income tax arrears
• VAT arrears
• TV licence fees

Will a debt management plan impact my credit report?

Your credit report is your history of managing and paying back credit. The higher your credit score, the better your chances are of securing future credit, such as loans, credit cards or a mortgage. A debt management plan may impact your credit score, as any reduced, missed or ‘partial repayments’ will show up on your report.

These ‘partial repayments’ show that you’ve struggled to afford your repayments, which can signal to lenders that you may be more high-risk. This means it can be harder to get credit during and following a debt management plan. You can find out more about how to build a good credit score with our helpful guide.

How long will a debt management plan impact my credit rating?

Even if you’re on an agreed debt management plan, if you pay less than the minimum repayment, it can stay on your credit report for up to six years. Details may show as:

• Missed payments
• Defaults
• ‘Partial repayments’
• Court action

So, while debt management plans are not directly recorded on your credit report, the consequences of repaying your debt in smaller instalments, or over a longer period of time, can stay on your report for six years. For visibility, creditors will often add a DMP flag to your credit report to show that your ‘partial payments’ were part of an agreed plan.

What happens after six years on a DMP?

Details surrounding court action, defaults, ‘partial payments’ and missed payments are removed from your report six years from the date that it happened. Even if you’re still paying back your debt, these flags will only stick around until then.

Can I get a loan while on a debt management plan?

Being on a debt management plan can impact your chances of being approved for a loan. Lenders will check your credit report to see if you have a good history of borrowing and meeting repayments. So, while it may still be possible to secure a loan while on a DMP, it’s certainly more challenging.

Here are some key factors to consider:

• Lenders will see missed or reduced repayments as a risk factor, meaning they may not approve your application. If you are offered a loan, you may be offered lower borrowing limits and higher interest rates.
• Taking out more credit may impact your debt management plan, so it’s best to contact your DMP provider first.
• It’s also important to consider whether you can afford to apply for more credit while you’re still paying off a debt management plan.

Responsible lenders registered with the Financial Conduct Authority (FCA) will consider your affordability as part of your application. That way, lenders can protect borrowers from applying for more credit than they can afford.

Can I get a mortgage on a DMP?

Getting a mortgage while you’re paying for a debt management plan can be challenging, as you’ve already flagged to lenders that you’re struggling to meet your current credit repayments. Like loan applications, if you are offered a mortgage, you may be offered higher interest rates, which can make your mortgage more expensive.

If you’re currently preparing to save up for a deposit and apply for a mortgage, it’s often a good idea to focus on settling your existing debts first.

Can I get a car loan while on a debt management plan?

Car loans follow a similar process to standard loans and borrowing options. Car finance companies also check your credit history and affordability to see if you’re likely to meet your repayments. If you’re currently paying for an active debt management plan, and you have a history of missed or ‘partial payments’, it can be difficult to secure car finance on a DMP.

If you’re seen as high risk, or that you can’t afford your car loan repayments, you may not be approved. Before applying for a car loan, your first step should be to discuss your current affordability and debt repayment plan with your DMP provider.

How to get a debt management plan

You can enquire about setting up a debt management plan with third-party debt charities and authorised debt management companies. Always check whether DMP providers are registered with the FCA by checking the FCA website.

When you get in touch with a DMP provider, they will:

1. Discuss your affordability and assess your debt.
2. Contact the creditors that you owe.
3. Explain your financial situation and inform them that you’ll be making repayments through a DMP.

Then, you’ll send your DMP provider a monthly payment, which they will share with each of your creditors individually.

If you’re worried about meeting your mortgage, rent, or other ‘priority debt’ payments, you’ll need to consider an alternative debt solution. The best course of action is to speak with a debt advisor who can guide you through your options. Hopefully, they might be able to help you find some breathing space if you need more time.

Is a debt management plan right for me?

Before arranging a debt management plan, it’s important to consider whether it’s the right path for you. Let’s dive into the potential advantages and drawbacks of applying for a debt management plan.

Potential advantages of debt management plans

Some of the potential benefits of setting up a debt management plan may include:

• More manageable instalments: If you can afford your priority debts but are struggling to keep up with credit cards and loans, this could help give you more breathing room.
• Legal protection: If they agree to your DMP, creditors may be less likely to take legal action as they know you’re finding a solution to your debt.
• Additional support: Some charities may contact creditors and arrange debt repayments for you, which can help alleviate stress and take extra tasks off your plate.
• Flexibility: You’ll never be tied into a debt management plan, meaning you can leave the agreement at any time. However, you’ll still owe any remaining credit to lenders and creditors.

Potential drawbacks to debt management plans

However, debt management plans may also carry potential risks:

• The impact on your credit report: Reduced or missed payments will stay on your credit report for future lenders to see, which can affect any credit applications you make in the future. It could even be classed as a default.
• Potential charges: While most debt charities offer DMP services for free, other DMP providers may charge borrowers to set up a plan.
• It could take longer to repay your debt: Making smaller repayments can be more affordable in the meantime, but it may take longer to repay your debt overall.
• Creditors may not freeze interest or charges: Your repayments may be smaller, but your debt may not be reduced by as much as you think due to additional fees.
• Creditors may still contact you: Even if you set up a debt management plan, creditors and lenders may still get in touch or take further action, such as involving a debt collection agency or taking court action.

How Moneyboat can help

Sometimes, emergency costs can appear out of nowhere. If a sudden appliance or car repair throws a spanner in the works, there are other solutions available to help resolve short-term cash flow issues. Moneyboat can offer fair and flexible lending options, letting you pay back short-term loans in two to six instalments.

As responsible lenders, we’ll always check to make sure your repayments are affordable and manageable. You can even use our flexible loans like a traditional payday loan if you prefer to repay in full the next time you receive funds. If you’re approved, it’s easy to accommodate your loan to your needs.

Borrowing isn’t for everyone

If you’re struggling to keep up with your current living expenses or credit repayments, borrowing more may not be the right choice for you. For more guidance, read our guide about what happens when you fall behind on loan payments to stay informed and help you regain control of your finances.

Discover more helpful resources

Starting a debt management plan can have long-term consequences that may impact your credit history for up to six years. If you’re concerned about meeting your credit repayments, there are plenty of free debt advice services available for confidential guidance and support.

• MoneyHelper offers a free debt advisor locator tool to help you find support and guidance on clearing your debts.
• Reach out to the StepChange debt advice service for free and impartial debt advice.
• Speak with Citizens Advice for independent guidance about debt management options.

Looking for more financial guides and insights? From breaking down terminology with our financial jargon guide to our personal cash flow guide, there’s plenty more to explore with Moneyboat.