Debt consolidation loan or IVA?
A consolidation loan replaces your debts with one new loan that you repay in full. It can work if you get an affordable rate and stop borrowing. An IVA is a legally binding insolvency agreement that writes off what is left of the included debts if you complete it, but it costs more in fees and stays on your credit file for years.
These two options sit at opposite ends. A consolidation loan is new borrowing: you take one loan, use it to pay off your other debts, and repay the new lender in full with interest. An IVA is a formal insolvency: you pay what you can afford for a fixed period, usually 5 or 6 years, and the rest of the debts in it is written off if you complete it. Which makes sense depends mostly on whether you can afford to repay everything.
This is general information, not a recommendation. Free, impartial debt advice is available from MoneyHelper, StepChange, Citizens Advice and National Debtline, and an adviser can look at every option with you: see where to get free debt advice.
How do they compare?
| Debt consolidation loan | IVA | |
|---|---|---|
| What it is | A new loan used to pay off existing debts | A legally binding agreement with creditors under the Insolvency Act 1986 |
| What you repay | Everything, plus interest on the new loan | What you can afford for the term. The rest of the included debts is written off if you complete it |
| Getting it | The lender decides, after a credit check | 75% by value of the creditors who vote must agree |
| Cost | Interest, and sometimes arrangement or early repayment fees | Fees taken from your payments, with no legal cap. Citizens Advice says around £5,000 on average |
| How long | The loan term you choose. Longer means lower payments but more interest | Usually 60 months, or 72 if your share of home equity is £10,000 or more |
| Your home | Not at risk with an unsecured loan. At risk with a secured loan | Protocol IVAs from 1 July 2025 do not ask you to sell or release equity |
| Credit file | A new loan. Missed payments are recorded | Recorded for usually 6 years from the start |
| Public record | No | Yes, on the Individual Insolvency Register while it runs |
| If it goes wrong | You still owe the loan, and a secured lender can repossess | The IVA can be terminated, and creditors can chase the full debts with frozen interest added back |
| Where | Across the UK | England, Wales and Northern Ireland only |
In Scotland the nearest equivalent to an IVA is a Protected Trust Deed: see debt solutions in Scotland.
When can a consolidation loan work?
StepChange describes debt consolidation as joining your debts together, “usually by taking out a loan and using the money to pay back the people you owe”. It tends to work when three things are true:
- your credit file is still good enough to get a reasonable interest rate
- the new monthly payment fits your budget after priority bills and essential costs
- you stop using the cards and accounts you have paid off
Hypothetical example A, using an assumed interest rate for illustration. You owe £12,000 across three credit cards and have £300 a month spare after essential bills. An unsecured loan of £12,000 at 12% APR over 5 years costs about £263 a month, about £15,800 in total. You repay everything, you are not insolvent, and you have a small buffer each month. The IVA Protocol says someone suitable for a protocol IVA will usually be unable to repay their debts in full within the IVA period, so this situation does not fit that profile.
When does consolidation go wrong?
Most problems come from treating the loan as the solution rather than a tool.
- Running up the old cards again. StepChange warns that “Having a debt consolidation loan does not stop you using credit. Many people end up taking on new debts, like credit cards, while they have the loan.” You then have the loan and new card debt.
- Stretching the term. StepChange says the longer you have the loan, “the more interest you take on”. A lower monthly payment over a longer term often costs more in total.
- Fees. Check for arrangement fees and early repayment charges before you sign.
- Being refused, or offered a poor rate. Lenders must make a reasonable assessment of your creditworthiness before lending. If you have already missed payments, a refusal or a high rate is more likely, and each full application leaves a hard search on your file.
If you are already behind on priority bills such as rent, council tax or energy, those come first: see priority and non-priority debts.
What are the risks of a secured consolidation loan?
Some consolidation loans, often called homeowner loans, are secured on your home. StepChange warns: “if you fall behind or cannot afford payments, the lender could repossess your home and sell it to get their money back.”
Securing the loan also changes what options you have later. Your credit card debts were unsecured. Once they are paid off with a secured loan, the debt is secured on your home, and:
- an IVA cannot affect a secured creditor’s right to enforce its security without that creditor’s agreement
- a debt management plan can only include unsecured debts
- secured debts cannot be included in a debt relief order, and bankruptcy does not clear them
Hypothetical example B, using assumed interest rates for illustration. You owe £35,000 across cards and loans and have £300 a month spare. An unsecured loan over 5 years at 12% APR would cost about £768 a month, which you cannot afford and a lender is unlikely to offer. A loan secured on your home at 9% APR over 20 years brings the payment down to about £307 a month, but you would repay about £73,700 in total and your home would be at risk for 20 years. A debt management plan at £300 a month would take around 117 months (nearly 10 years), even if every creditor froze interest. A 60-month IVA at £300 a month would take £18,000 in total, with fees coming out of that first, and whatever is left of the included debts would be written off if you complete it. Here an IVA may be worth assessing, alongside its downsides.
When is an IVA more often considered?
An IVA is more often looked at when your debts are too large to repay in full within a reasonable time, and you have a regular income to pay something each month. The IVA Protocol’s usual profile is debts of £7,000 or more, a regular sustainable income other than state benefits, uncomplicated assets, and not being eligible for a debt relief order. That is guidance, not law. See who qualifies for an IVA.
What it offers that a loan does not:
- creditors bound by the IVA cannot take further action to recover the debts included in it
- interest and charges on those debts are frozen
- whatever is left of the included debts is written off if you complete it
What it costs you:
- fees taken from your payments, with your first payments going mostly on fees: see how much an IVA costs
- a formal insolvency on the public register while it runs, and on your credit file for usually 6 years from the start
- 5 or 6 years of payments, annual reviews and restrictions, including on borrowing
- the risk of failure: about a third of IVAs registered between 2016 and 2018 were terminated before they finished, and creditors can then chase the full debts again
Our guide to the pros and cons of an IVA goes through these in more detail.
Want to know whether an IVA could work for you? Answer a few questions about your debts and income. It takes about 3 minutes, and it is free and confidential.
What about the other options?
A loan and an IVA are not the only choices, and for many people neither is the best fit.
- A debt management plan repays everything at an affordable rate without new borrowing, and is free from debt charities. The IVA Protocol says that if a DMP could clear your debts over a similar period with a significantly higher return to creditors, a protocol IVA is unlikely to be suitable. See IVA or debt management plan?
- A debt relief order is free and suits people with little spare income and few assets.
- Bankruptcy clears most debts after usually 12 months, but has serious consequences, particularly for homeowners.
- Breathing Space pauses interest and creditor action for up to 60 days while you get advice.
For all of them side by side, see debt solutions compared.
What do people get wrong?
- “A consolidation loan reduces my debt.” It changes who you owe. The total only falls if the new interest rate is lower and the term is not much longer.
- “I’ll close the old cards later.” Close or cut them up once they are paid off, or the balances can come back.
- “Securing it on the house is safer because the rate is lower.” The lower rate comes with the risk of losing your home.
- “An advert for debt consolidation will find me a loan.” The FCA warns that some debt advertisers push people towards IVAs because they are paid to. Ask anyone you speak to whether they are paid for referrals.
What to do next
- Add up your debts and work out what you can afford each month after priority bills and essentials.
- Use an eligibility checker to see what loan rates you are likely to get, without a hard search.
- Compare the total cost of the loan with the other options, not just the monthly payment.
- Talk to a free debt adviser before securing anything on your home. If you use our checker, we may pass your details to a licensed insolvency practitioner or debt adviser.
Common questions
Can I get a consolidation loan with bad credit?
It is harder. Lenders must assess your creditworthiness before lending, and missed payments or defaults make a refusal or a high interest rate more likely. Use an eligibility checker, which leaves a soft search, before you apply.
Can I get a consolidation loan during an IVA?
Only with your supervisor's written approval, because protocol IVAs do not allow credit of more than £500 without it. Few mainstream lenders lend to people in an active IVA.
Is a balance transfer card a form of consolidation?
Yes. Moving card balances to a card with a low introductory rate can cut interest, but there is often a transfer fee, and the rate rises when the offer ends. It only helps if you can clear the balance in that time and stop using the old cards.
Is a debt management plan the same as consolidation?
Some firms describe a DMP as consolidation because you make one payment, but it is not a loan. You still owe the original creditors, and free DMPs are available from debt charities.
Related guides
- IVA or debt management plan? How a DMP and an IVA compare on cost, protection, length and credit file, with examples.
- Pros and cons of an IVA The real advantages and disadvantages of an IVA, side by side, with how it compares to other options.
- How much does an IVA cost? The fees in an IVA, how they are taken from your payments, and how that compares with other options.
- Priority and non-priority debts: what to pay first Which debts come first, what can happen if you miss them, and how debt solutions treat each type.