As household credit commitments continue to rise, many individuals find themselves seeking assistance from third-party companies to manage their debts. These companies, known as Debt Management Companies (DMPs), have gained both attention and controversy over the years. In this article, we will shed light on the truth about debt management, exploring what it entails, its potential benefits and pitfalls, and alternative options for those struggling with debt.
What is a Debt Management Plan?
A Debt Management Plan is an informal arrangement wherein a debt management company assumes responsibility for managing a person’s outstanding debts. The company acts as an intermediary, negotiating reduced fees and frozen interest with the creditors on behalf of the client. The aim is to provide relief from constant letters and phone calls from creditors while facilitating a structured repayment plan.
When to Consider a Debt Management Plan
It is important to note that a debt management plan should only be considered as a last resort for individuals burdened with significant debts across multiple creditors. Before exploring this option, individuals should exhaust all efforts to engage directly with their creditors and establish a mutually agreeable payment plan. Lenders and credit companies are often willing to accommodate those experiencing financial difficulties.
Key Considerations for Debt Management Plans
Before entering into a Debt Management Plan, it is essential to consider the following factors:
- Upfront Fees: Never pay any upfront fees before the plan is set up. Reputable debt management companies do not charge upfront fees.
- Credit Implications: It is crucial to understand that a debt management plan can impact an individual’s credit file. As not all debts are fully paid, lenders may default on the loans and credit cards included in the plan, which will be recorded on the individual’s credit file. This may make it more challenging to borrow money in the future.
- Interest Freeze: Despite being commonly advertised, there are no guarantees that a debt management company can freeze interest on accounts. Each lender has its own policies and may not freeze interest before defaulting the account.
- Service Charges: Debt management companies charge for their services, which means that not all of the monthly payment goes toward reducing the outstanding credit balances. Fees typically range from 17% to 20%. Contacting creditors directly may result in a more significant portion of the payment going towards reducing the outstanding balance.
Exploring Alternative Options
While debt management plans may seem like the only option for individuals facing financial challenges, it is important to consider alternative solutions:
- Direct Negotiation: Engage directly with creditors to establish revised payment plans or negotiate settlements. Many creditors are willing to work with individuals to find mutually agreeable solutions.
- Unsecured Lenders: Explore options provided by new unsecured lenders who specialize in working with individuals with bad credit. These lenders offer loan products designed for those in challenging financial situations.
- Guarantor Loans: Consider companies that offer guarantor loans, wherein a trusted individual with good credit agrees to act as a guarantor for the loan. This can increase the chances of approval, even with a low credit score.
Debt management plans can provide temporary relief for individuals struggling with multiple debts. However, it is crucial to weigh the pros and cons and carefully consider alternative options before committing to such a plan. Understanding the potential impact on credit files, service fees charged by debt management companies, and the possibility of interest not being frozen is essential. By exploring alternative solutions and engaging directly with creditors, individuals can find suitable strategies to address their debt while minimizing long-term consequences. There are now a number of new unsecured lenders, who will accept bad credit, and there is an increasing number of companies that offer guarantor loans.
