A debt management plan is a last resort when your debt is accumulating because of the soaring cost of living. You are eligible for this plan if and only if you can make one affordable payment every month. The payment you make is divided up between your creditors, who are impelled to freeze interest and not to charge fees, so your debt does not mushroom.
Bear in mind a debt management plan does not include all kinds of debts. The debts you can include are called non-priority debts, and they are credit cards, overdrafts, unsecured loans, and Buy Now Pay Later. Secured loans such as mortgages and auto loans and other priority debts such as rent arrears and council taxes are managed with payment arrangements, not with a debt management plan.
Most of the people when choosing a debt management plan are always concerned about whether lenders will freeze interest rates. In fact, many fear of being taken to court. Here are some concerns related to a debt management plan:
- Will you keep receiving phone calls from lenders?
You will stop making payments to your creditors the second that you sign up for a debt management plan. Of course, you will keep receiving phone calls, text messages, and emails for a couple of days. Tell them that you have applied for a debt management plan, and the debt management company will soon contact them.
The sooner you contact them, the better. Once your debt management plan is approved, the debt management company will make payments to lenders, not you. This might take some time to receive approval from the debt management company, so be patient. Inform your creditors immediately that you have stopped making payments because you have applied for a debt management plan.
- How much will you pay each month?
At the time of considering a debt management plan, most people are always concerned about the size of monthly instalment and the total amount of debt. The debt management company will decide the size of monthly instalment based on your financial condition. Paying too much and paying too low are both dangerous.
If the size of payments is high, you will not be able to keep up with other expenses. Chances are you end up borrowing more money and fall deeper into debt. If you pay too little money, your debt management plan will never end.
A debt management plan does not tie you to a long-term contract. However, if your financial circumstances change, your payment plan will also change. The amount of the payment could be more or less depending on your financial circumstances.
The best way to determine how much amount of money you should pay is to be realistic about your expenses. Not to mention, you will have to cut back on discretionary expenses. Despite paying down the debt, you are supposed to save a small amount of money. A golden rule of thumb says that you must save some money so you do not have to borrow money to meet unexpected expenses.
- How long will your debt management plan last?
A debt management plan does not last for a long period of time; however, it depends on the total size of the debt you owe. Sometimes, the payment you choose is so little that it takes a very long time. You should consider the monthly payment size carefully so you do not find yourself tied to payments.
Normally, the debt management plan takes a long time when you have other secured debts to pay off. You cannot miss the payment on them to speed up your debt management plan. Bear in mind that you cannot use debt consolidation loans in the UK when you are already on a debt management plan. This is because consolidation loans are also aimed at non-essential expenses.
You should consider low debt management plans only when:
- You know that it will take a few months to land a new job after redundancy.
- You are currently on maternity leave, and you will soon be in office.
- Your car loan will be completely settled in a few months.
- You have priority debts such as mortgages, car loans, tax, and rent arrears. Large payments go toward priority debts, and a small amount goes toward your debt management plan.
In these situations, it does not matter how small your debt management plan is. You might be even asked to pay as little as £1. However, as soon as your financial situation improves, your monthly payments will be revised. It is always suggested that you avoid choosing a lower monthly payment plan in normal circumstances; otherwise, you will keep paying off the debt for eternity.
Amid all of that, you should never compromise on setting aside money. Having a rainy-day fund will preclude you from taking out loans such as Annuityloans to meet small emergency expenses.
- How to speed up your debt management plan?
Here are the ways to sign up for an affordability claim:
- By foiling an affordability complaint, you can finish your payments sooner.
- If you have already been paying off debts for a long period of time, you can decide to use your pension. However, it is just an option. Most experts will not recommend this.
- If you inherit money, you are absolutely free to use the money the way you want. You can use the windfall to repay your debt. In this way, you can easily finish your debt management plan.
The bottom line
A debt management plan can cover non-priority debt. A golden rule of thumb says that you should carefully choose the repayment plan. Choosing a lower plan will make it hard for you to repay the debt faster; however, choosing a larger payment plan can make it challenging for you to clear the dues. You should always ensure that you stick to the payment.
Do not forget to discharge secured debts along with it because otherwise, you will lose your valuable assets. It is recommended that you get all your queries solved by the debt management company before signing up for the plan.
