What Is A Debt Management Plan?

Some types of loans, such as a mortgage, can be defined as good debt, as they support you in building a positive future and financial health. However, too much debt can leave you in a difficult position without a clear path to financial freedom. If you find yourself in this position, one solution that you may want to consider is a debt management plan. This is a type of repayment plan that is set up and managed by a credit counselling agency to help you stay on top of your debts, and avoid the negative impacts of defaulting or declaring bankruptcy.

At Debt Consolidation Loans, we believe in offering as much advice as possible to help you find the best solution for your financial situation. On this page, we will be detailing what a debt management plan is, when you might consider applying for one, and the debt management plan pros and cons. Hopefully, this page will provide you with the resources you need to start managing your cashflow and repayments to help you future-proof your finance.

Man and woman worried about debts and thinking about a debt management plan

Is A Debt Management Plan Right For You?

With a debt management payment plan, you will typically use the help of credit counsellor who will review your financial situation and help you understand your options. If they deem that a plan is right for you, they can work with the creditors on your behalf to develop a payment structure that works.

For some creditors, they may waive fees and lower the interest rate on your outstanding balance if you agree to repay in full through a management plan. However, this will not apply to all providers, so you may still need to pay with the current interest rate. Overall, the goal of the agency is to have your debts fully repaid within three to five years, so they could be truly beneficial if you are in a difficult situation.

This type of plan may be right for you if:

  • You can afford the monthly repayments on your living costs and priority debts, like rent, council tax or a mortgage, but struggle to keep up with credit card debt and loans
  • You would like someone to communicate with your creditors on your behalf
  • Making one set monthly payment will help you to budget in the long run

Why debt consolidation?

  • Improve your monthly budget
    A debt consolidation loan will enable you to group all your existing borrowing and the monthly repayments are easier to manage.
  • Reduced overall repayments
    A debt consolidation loan could even save you money each month if the interest rate is less than the combined total interest of the previous loans.
  • Improved credit rating
    The simplicity of repaying a debt consolidation loan means that you are more likely to repay the debt on time every month. This will prove you to be a responsible borrower, which will have a positive effect on your credit score.

 

Debt Management Plan Pros And Cons

One of the main reasons why people search for debt management plan online in the UK is for a sense of relief and a practical solution to managing their debts. Dealing with stress is not enjoyable at the best of times, so no one should be burdened with financial stress, and this is something that this type of plan can help with. Some of the other benefits include:

  • Receiving professional advice – in the initial stages of your plan, you will have a session with your counsellor to go over your budget, debts, goals, and options to help you determine the best course of action. Even if decide a plan is not right for you, you may find this session useful.
  • Potentially waived fees and lower rates – some creditors may waive previously charged fees and lower your interest rate to help you pay down your debts much quicker.
  • One monthly payment – you should receive one monthly statement and send one monthly payment to the counselling agency. This can be a lot easier to manage than multiple payments to various creditors.
  • Accountability – while it is possible to pay off your debts alone, the best debt management plan offers you a solution to pay off your balances much quicker than you may have expected. You will also have an assigned counsellor who will keep you accountable.

However, while there are plenty of benefits from this type of financial plan, there are also some disadvantages to keep in mind. They are not ideal for every situation, so careful consideration is needed before applying for one, and some potential drawbacks include:

  • Your debts will not be written off – it will not remove debts from your life, but rather make them easier to manage. This means you will still need to repay in full.
  • Creditors may not co-operate – your creditors are under no obligation to enter into a plan, and may still contact you directly to ask for immediate payment.
  • There may be a fee – the agency you choose to apply with may charge you a fee for using their services, but you may be able to find a company that could help you for a more affordable price or even for free.
  • Secured debts are not covered – if your debts are secured, such as a mortgage or student loan, these will not be covered by the plan. Your counsellor may be able to offer guidance on repaying these debts, but you will generally need to manage those payments on your own.

Why debt consolidation?

  • Improve your monthly budget
    A debt consolidation loan will enable you to group all your existing borrowing and the monthly repayments are easier to manage.
  • Reduced overall repayments
    A debt consolidation loan could even save you money each month if the interest rate is less than the combined total interest of the previous loans.
  • Improved credit rating
    The simplicity of repaying a debt consolidation loan means that you are more likely to repay the debt on time every month. This will prove you to be a responsible borrower, which will have a positive effect on your credit score.

 

Will A Debt Management Payment Plan Affect My Credit?

Whether it will impact your credit or not entirely depends on the way your plan is structured. For example, if you are still paying the full contractual amounts to your creditors, your plan is not likely to appear on your report. If you are paying less than the minimum payment, as agreed with your creditors, ‘partial payments’ will be recorded on your credit file. These will remain on your report for six years, even if the debt has not been fully repaid.

There are several types of information that a creditor could record on your credit file, which could include:

  • Payment history – the payments you have made up to the point of your plan will have been logged on your credit file. As your plan payments could be less than your original payments, your credit history could show partial payments being made towards the debt, even if the reduced payments are agreed with your creditor.
  • Financial plan flag or marker – each account included in your plan could have a marker added to it that shows repayments are being made through a management plan. A creditor can only add a plan marker if they accept your offer of payment.
  • Defaults – if your creditor defaults your account, this will be added to your credit report. You may not receive a default for every debt on a plan, but it is common for accounts to default.

If this type of plan is something that you think could work for you, take the time to compare debt management plans to find the best option. You should be able to ask questions with no pressure to apply, and find an agency that offers transparency. If you are not sure that a plan is right for you, there are other options you could try, such as unsecured debt consolidation loans, an IVA, bankruptcy, or seeking further help from the Money Advice Service.

How Do I Find The Best Debt Management Plan For Me?

When searching for the best debt management plan, you should make sure that you look for providers that:

  • Are licensed by the FCA
  • Discuss all the possible options available to you to handle your issues in the best way
  • Tell you clearly at the beginning of the process how much it will cost
  • Help you to understand what will happen if they stop running the plan if you miss repayments

You should also compare debt management plans to make sure you find a provider that offers a good deal. You can use comparison tools to find an agency that offers good results, an affordable service, and a friendly approach to put you at ease.

If you need any further help with finding a debt management plan online in the UK, please seek impartial help from charities such as StepChange or Money Advice Service.