You can deal with different financial problems in several ways if you find yourself in difficult times. A common method to reduce the amount of debt affecting you, your business or your household is to implement a debt management plan. There are a number of advantages that come with this approach; however, there are also potential drawbacks. You need to consider both the pros and cons before deciding whether you would like to move forward with your debt management plan. These will be discussed throughout the article below.
What is a Debt Management Plan?
A debt management plan (otherwise known as a DMP) is a plan that allows you to pay off the different debts you owe at an affordable rate. They are good if you have non-priority debts, as your DMP provider will be able to work out an affordable amount you can pay monthly and put this forward to your creditors.
The Benefits of a Debt Management Plan
A number of different benefits come with putting together and using a debt management plan. These include but are not limited to the following:
- Only One Monthly Payment is Needed
When you have a solid debt management plan in place, you don’t need to worry about making several different payments every month; instead, everything is condensed into one. This payment will go straight to your credit counselling agency and be distributed to the agreed creditors on your behalf. This is very useful as it means you don’t have to worry about having different accounts and making numerous payments. This is good if one reason you have outstanding debts is that you find it hard to keep up with due dates. As long as you make the payments, you will stay on top of your debts.
- You Will Likely Be Able to Secure Lower Interest Rates
When you put together a debt management plan, your credit counsellor will be responsible for negotiating an interest level on your behalf. Given you will have an expert doing this, it means that they might be able to secure a lower interest rate for you so that you won’t end up paying as much overall. When you are paying off your credit card and unsecured loans, you tend to get higher interest rates which can massively increase how much you need to pay, so securing the lowest amount possible is advisable.
- You Will Most Likely Save Money
When you can negotiate effective terms and interest rates, most people who use a debt management plan can pay their debts much quicker (usually between three to five years). Combining the lower interest payments with the increased payment time will save a substantial amount of money as a whole.
- You Will Be Able to See Your Credit Score Increase Over Time
There isn’t necessarily a guarantee that having a DMP will improve your credit score; however, on average, a DMP sees a client’s credit score increase by roughly 62 points after about two years. This rolls on from the above as a DMP makes it easier to remain consistent with repayments and subsequently reduce debt quickly; both of these factors come into play when reducing your credit score.
The Disadvantages of a Debt Management Plan
Of course, there are also potential disadvantages that come with using a debt management plan which you need to be aware of before you set one up. These include:
- You Need to Close Your Credit Card Accounts
If you have any credit cards included in your debt management plan, these need to be closed. This is because organisations need to ensure you are not taking on any more debt while trying to pay back the outstanding amount. This will also contribute towards locking in a lower interest rate and ensuring your debt management plan will benefit from the above-referenced advantages.
Even if you have some credit cards that aren’t included in your DMP, you will still be strongly advised not to use them unless there is an emergency. Creditors involved in the process will likely monitor your spending patterns, and if there is any new debt, they might take steps to close your account.
- The Only Way to See Benefits is to Make Consistent Payments
As can be seen above, there are a number of different benefits that come with sticking to a debt management plan, including the likes of lower monthly payments, simpler payments, a lower interest rate and more; however, these will only occur if you continue to make the correct monthly payments. You must keep up with these payments to experience the benefits of a debt management plan.
- Not Every Creditor Will Participate
Granted, most creditors will participate in debt management, but not everyone will. The agency you enlist will try to negotiate effectively and have all relevant creditors participate, but that doesn’t mean everyone will agree. It’s rare that someone will refuse, but some creditors are hesitant to engage in this kind of plan and, if this is the case, then debt management might not be the best option for you.
Do You Need Help with a Debt Management Plan?
If you are interested in setting up a debt management plan but aren’t sure where to start, then you will be happy to know that at Simple Liquidation, we are more than happy to help. Our experts will sit down with you to thoroughly understand your debt and provide solutions on how you can progress. If you have any questions or require any further information, then do not hesitate to get in touch.