Debt management plans seem to be a popular choice for cash strapped individuals needing a way out of their financial slump. But how does a debt management plan work and how can it benefit you?
A debt management plan is relatively easy to put in place. You work out how much you can afford a month, and then split it equally amongst your creditors on a pro rata basis. If you own a home, a debt management plan will not normally force you to release any equity from your house.
An important thing to remember is that a debt management plan is not legally binding, which could prove to be both an advantage and a disadvantage. Because this agreement is informal, you do not have to include all your creditors.
If this sounds good to you, keep in mind that there are some pitfalls with this type of agreement. Firstly, your monthly payments are reduced, making paying a lot easier. However, this should not fool you into thinking that you do not have to pay everything back. Because of this reduced rate, it will take longer to pay back – about 8-10 years. This is a long time to be living with a tight budget, with just enough to make ends meet.
Secondly, a debt management plan is not a legal agreement; therefore creditors have the right to go back on their original agreement. This could mean creditors demanding money every month, which could be more than you can reasonably afford.
Thirdly, creditors who agree to a debt management plan are under no legal obligation to freeze their interest and charges. They could also threaten to add interest if you do not agree to pay them more each month.
If you feel that a debt consolidation loan is the way to go, do not let the negative side affect your decision too much. Sure, it is something to take into consideration, but debt management plans can be an excellent tool for resolving debt. Speak to a financial advisor about which options are best for you