When you’re struggling with multiple types of debt, it can feel overwhelming trying to work out the best way forward. Two popular options people consider are debt consolidation loans and Individual Voluntary Arrangements (IVAs), but they work in very different ways.
Debt Consolidation Loans vs IVAs: At a Glance
| Feature | Debt Consolidation Loan | Individual Voluntary Arrangement (IVA) |
| What it does | Combines multiple debts into one loan | Formal agreement to repay what you can afford over 5-6 years |
| Debt written off | No – you repay everything you borrowed, plus interest | Yes – remaining debt written off after completion** |
| Credit score impact | Hard credit check required; may improve score over time | Impact for 6 years |
| Monthly payments | Fixed payment based on loan amount and interest rate | Based on what you can afford after essential living costs |
| Eligibility | Requires good credit score and stable income | Must owe £6,000+ to two or more creditors |
| Legal protection | None – creditors can still pursue you if you miss payments | Yes – creditors cannot take legal action once approved |
| Fees | Interest on the loan; possible arrangement fees | Setup and ongoing fees (usually deducted from payments) |
| Duration | Typically 1-10 years, depending on loan terms | Usually 5-6 years |
What is a debt consolidation loan?
A debt consolidation loan is a way of combining multiple debts into one single loan with one monthly payment. You borrow enough money to pay off all your existing debts – like credit cards, overdrafts, and payday loans – and then repay this new loan over an agreed period.
The main appeal is simplicity. Instead of juggling several different payments to different creditors each month, you only have one payment to manage. If you can secure a lower interest rate than you’re currently paying across your various debts, you might also reduce the overall cost of borrowing.
However, debt consolidation loans aren’t suitable for everyone. You’ll need a decent credit score to be approved, and you need to be confident you can afford the monthly repayments. It’s also worth noting that whilst your monthly payment might be lower, you could end up paying more interest overall if you extend the repayment term.
Debt Consolidation Benefits |
Debt Consolidation Considerations |
| One monthly payment instead of several | Requires good credit score to access best rates |
| Potential for lower interest rate | You must pay back the full debt amount plus interest – no guarantee your creditors will agree to freeze interest and charges |
| Can help you budget more easily | May pay more interest overall if loan term is extended |
| May improve credit score if you keep up with payments | No legal protection from creditors |
| Keeps debt management in your own hands | Risk of building up new debts if spending habits don’t change |
| No impact on employment or professional qualifications | Secured loans put your home at risk if you can’t pay |
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors to repay what you can afford over a set period – typically five to six years. It’s a formal insolvency solution that must be set up by a licensed Insolvency Practitioner.
With an IVA, you make one affordable monthly payment based on your income and essential living costs. This payment is divided amongst your creditors. Once you’ve completed the agreed term, any remaining debt is written off – even if you’ve only repaid a fraction of what you originally owed.
The key benefit is legal protection. Once your IVA is approved by 75% of your creditors, they cannot chase you for payment, add more interest or charges, or take legal action against you. This gives you breathing space to get back on your feet without the constant pressure of debt collectors.
However, an IVA is a serious commitment. It will impact your credit file for six years, and there are restrictions while you’re in the arrangement, such as limits on borrowing and requirements to declare it in certain circumstances. You’ll also pay fees to your Insolvency Practitioner, though these are usually taken from your monthly payments.
IVA Benefits |
IVA Considerations |
| Writes off unaffordable unsecured debt after completion** | Impacts your credit file for 6 years |
| Legal protection from creditors – no more chasing or legal action | Must be set up by a licensed Insolvency Practitioner |
| Payments based on what you can genuinely afford | Setup and ongoing fees apply |
| Interest and charges are frozen | Windfall payments (inheritance, bonuses) may need to go towards debt |
| One affordable monthly payment | May affect certain professional roles or qualifications |
| Keeps you out of bankruptcy | Must be approved by 75% of creditors by debt value |
| Flexible – can be adjusted if circumstances change |
Similarities between an IVA and Debt Consolidation
Whilst consolidating your debt with a loan and IVAs are very different solutions, they do share some common ground.
Both options simplify your debt repayments by replacing multiple payments to different creditors with one single monthly payment. This makes budgeting easier and reduces the administrative burden of managing several debts at once.
They both require a regular monthly commitment over an extended period – typically several years. You’ll need to demonstrate that you have a stable income and can afford the monthly payments, whether that’s a loan repayment or an IVA contribution.
Neither solution addresses the root cause of debt problems. If overspending or poor money management led to your debt situation, you’ll need to make changes to your spending habits regardless of which option you choose. Without addressing the underlying issues, there’s a risk of falling back into debt once the arrangement ends.
Both options also involve some form of commitment and discipline. You’re agreeing to stick to a structured repayment plan, and failing to keep up with payments can have serious consequences – whether that’s defaulting on a loan or your IVA failing.
Differences between Debt Consolidation & IVAs
Debt Write-Off
The most fundamental difference is that an IVA can write off a substantial portion of your debt**, whereas a consolidation loan cannot. With a consolidation loan, you’re still responsible for repaying every penny you borrowed, plus interest. An IVA means you only repay what you can afford over the agreed term, and any remaining balance is legally written off*.
Eligibility Requirements
Debt consolidation loans require you to have a good credit score and prove that you can afford the repayments. If your credit history is poor or your income is limited, you may struggle to be approved or face very high interest rates. IVAs are designed for people who cannot afford to repay their debts in full, so eligibility is based on having unmanageable debt (typically £7,000 or more owed to at least two creditors) rather than a good credit rating.
Legal Status and Protection
An IVA is a formal, legally binding agreement that provides immediate protection from creditors. Once approved, creditors cannot contact you, add further interest or charges, or take legal action against you. A debt consolidation loan doesn’t offer this protection – if you miss payments, creditors can still chase you, and the lender can take action to recover the debt.
Impact on Credit File
Both options affect your credit score, but in different ways. A debt consolidation loan involves a hard credit check and taking on new credit, but if you keep up with payments, it can improve your score over time. An IVA is recorded on your credit file for six years from the start date and is a formal insolvency solution.
Cost and Fees
With a consolidation loan, you pay interest on the amount borrowed, as well as possibly arrangement fees. The total cost depends on the interest rate and loan term. With an IVA, you don’t pay interest on your debts, but you do pay fees to your Insolvency Practitioner – typically a setup fee and ongoing monthly fees, which are usually deducted from your contributions before the money goes to creditors.
Flexibility
Debt consolidation loans have fixed terms – you’ve agreed to repay a set amount over a set period, and changing this usually involves renegotiating or refinancing. IVAs offer more flexibility. If your circumstances change – you lose your job, get a pay rise, or receive a windfall – your IVA can be reviewed and adjusted accordingly, although this may be subject to creditor approval.
Which is the best debt solution?
There’s no one-size-fits-all answer – the best debt solution depends entirely on your individual circumstances.
A debt consolidation loan might be right for you if:
- You have a good credit score and can access competitive interest rates
- You can comfortably afford to repay your debts in full, but want to simplify payments
- Your debts are manageable and you’re confident you can keep up with a fixed monthly payment
- You want to avoid the long-term credit implications of a formal insolvency solution
- You have a stable income and your financial situation is improving
An IVA might be more suitable if:
- You owe £7,000 or more to two or more creditors
- You need a realistic, affordable payment plan based on what you can genuinely afford
- You have a regular income, whether that’s employment, self-employment or a pension)
- You want legal protection
- You want a clear path to becoming debt-free**
