A debt management plan is aimed at people who have more than one debt (besides a mortgage or secured loan). If they can no longer afford the repayments on their unsecured debts, they could try to arrange a debt management plan with their lenders to make them more affordable.
A debt management plan is an informal agreement with your lenders which allows you repay your unsecured debts at a rate you can afford over a longer period. If the debt management plan is arranged with the help of a debt management company, it’s often possible to consolidate all the debt repayments into one monthly payment.
One thing to consider before starting a debt management plan is that, although it should make your monthly payments more affordable, you may have to pay interest for longer – meaning you could pay more overall.
However, sometimes lenders will freeze interest or charges as part of the agreement, which would prevent the debt from getting any bigger.
Finally, lowering your monthly payments would be noted on your credit file for six years, and this could make it difficult to borrow more money in that time.
And remember – your lenders are not obliged to accept a debt management plan. If you’re struggling to come to an agreement, talk to a debt adviser about what other solutions are available.
Debt consolidation
Debt consolidation is more aimed at people who are managing well enough financially, but want to rearrange their finances or reduce their outgoings.
It involves repaying multiple debts with a new loan, leaving you with one debt and one monthly payment. Some of the key differences between this and a debt management plan include:
- A debt consolidation loan will clear all of your unsecured debts and leave you with one larger loan to repay, whereas a debt management plan involves repaying each of your unsecured debts gradually.
- With a debt consolidation loan you will pay one fixed rate of interest, whereas on a debt management plan you may be paying different levels of interest on each debt (if interest isn’t frozen).
- You can only qualify for a debt management plan if you cannot afford your existing repayments, whereas a debt consolidation loan would not be suitable if you cannot afford your repayments.
An advantage of a debt consolidation loan is that it simplifies your finances by leaving you with one monthly payment. Another is that you could lower your repayments by spreading them over a longer period, which could free up money in your monthly budget. However, as with a debt management plan, spreading the loan over a longer period may cost you more in interest overall, so consider this before you apply.