If you’re struggling to manage your debts, you’re not alone. Many people find themselves in a similar situation and can’t seem to get out of it. One solution to consider is a debt management plan (DMP). But before you jump into it, it’s essential to weigh the pros and cons of this option.
What is a Debt Management Plan
A DMP is an informal agreement between you and your creditors to pay back your debts over time. It’s usually managed by a debt management company (DMC), which will negotiate with your creditors on your behalf and help you create a budget to ensure you can afford the payments. Just remember if you used a DMC, they will charge for this service.
Pros of Debt Management Plans
- Lower monthly payments: With a DMP, you can reduce your monthly payments to an amount that’s more manageable for you. This means you can still pay off your debts while having enough money to cover your other expenses.
- Simpler debt management: Instead of juggling multiple debt payments each month, a DMP consolidates your debts into one monthly payment (if you do this via a DMC). This can simplify your finances and make it easier to manage your money.
- Reduced interest rates: Many creditors are willing to reduce the interest rates on your debts if you’re on a DMP. This can help you pay off your debts faster and save money in the long run. Your DMC should push for 0% interest rates.
- No legal action (possibly): If you’re struggling to pay your debts, your creditors may take legal action against you. However, if you’re on a DMP, this is less likely to happen, as long as you keep up with your payments.
- A short term DMP is also good, as it gives you time to explore and fully understand other debt solutions.
- DMP’s are also more flexible, so if your wages decrease, payments to creditors can easily be adjusted to reflect the change in your circumstances.
Cons of Debt Management Plans
- Extended repayment period: While a DMP can help you lower your monthly payments, it can also extend your repayment period. This means you’ll be in debt for longer, and you may end up paying more in interest in the long run. Interest rates are 0% once you enter into a DMP.
- Damage to your credit score: A DMP will show up on your credit report, and it may have a negative impact on your credit score. This can make it harder to get credit in the future or result in higher interest rates.
- Fees: Debt management companies often charge fees for their services, which can eat into your monthly payments and make it harder to pay off your debts.
- Not all debts are eligible: Some types of debts, such as secured debts, can’t be included in a DMP. This means you may still need to make separate payments for those debts.
How Long is a Debt Management Plan For?
In theory there is no time limit on how long a debt management plan (DMP) will last. Often, a DMP can be a useful tool for short term solution. giving you time to think and investigate other debt solutions should you want to.
A debt management plan can be a useful tool for managing your debts, but it’s not without its downsides. It’s essential to weigh the pros and cons carefully and consider other options. However, once in a DMP, there is much less to zero pressure from creditors, this as said previously does give you a chance to investigate other debt solutions thoroughly.