As the cost-of-living crisis rumbles on, more households are turning to credit to pay for the things they need. According to the Bank of England, net borrowing of consumer credit by individuals in April was £1.6 billion, split between £0.7 billion of borrowing on credit cards and £0.9 billion of borrowing through other forms of consumer credit, such as car dealership finance and personal loans. 

The annual growth rate for all consumer credit was 7.7% at the same time as the cost of servicing this credit also increased. The effective interest rate on interest-charging overdrafts rose to 21.86% in April from 21.07%, the effective rate on new personal loans to individuals increased by 50 basis points to 8.29%, and the effective rate on interest bearing credit cards was 20.13%. Although this actually fell in April from a record high of 20.29% in March. 

It’s little wonder then that consumer charities are flagging this debt mountain as a potential timebomb for household finances. However, there are options for borrowers who are struggling with debt to manage the problem and rectify the situation. One of those options is by entering a Debt Management Plan (DMP). As a broker there is an opportunity to address, educate, and challenge potential customer misconceptions, through marketing efforts. We estimate there are a growing number of consumers who may be unaware of their mortgage options with an active or satisfied DMP. 

A DMP is an agreement between an individual and their creditors to pay debts and is typically used when borrowers can only afford to pay less than their contractual repayments each month.  

With a DMP, a borrower should ultimately repay the debts in full, and so this type of arrangement is very different to an IVA, which is a form of insolvency where a percentage of the debt is written off. As such, IVAs are entered into the insolvency register, but a DMP will only show on a credit file if one of the participating creditors chooses to enter it directly. 

Borrowers can arrange DMPs themselves, but they will generally approach a specialist company, licensed by the FCA, who will arrange a plan with creditors, often for a fee.  

The debt management company will work with the borrower to understand full details of their income, financial commitments and household expenses to work out a realistic monthly payment. The company will then attempt to agree a reduced monthly payment with each of the creditors. 

Creditors do not have to agree to the DMP but will often decide that it is better to receive reduced amounts regularly through the DMP, rather than irregular payments direct from the borrower. Each month, the borrower then makes the agreed payments to the debt management company, which in turn shares the money between the creditors. 

Statistics indicate that there is an increasing chance you will encounter a customer looking for a mortgage, while in an active DMP, and the good news is, there are options out there. 

There are lenders, like Pepper Money, that will take the view that a borrower who has successfully maintained payments on a plan for a year or more has demonstrated a determination to rehabilitate their finances. And, as lenders in this market tend to assess affordability using the contractual loan payments as outgoings rather than the agreed DMP monthly payments, there is a good indication that an individual who has successfully maintained a plan is also back on track from an affordability perspective. 

A DMP is one tool that customers can use to tackle periods of financial difficulty and, during this difficult economic environment, it’s likely to be a growing area of demand. By working with specialist lenders, like Pepper Money, that can consider customers with active DMPs and take an individual approach to underwriting, you can help your customers to secure a new mortgage even while they are taking steps to tackle their unsecured debt. 

Ryan Brailsford Pepper Money


Ryan Brailsford
Director of Business
at Pepper Money