What are the pros and cons of a debt management plan?

A debt management plan is a plan that helps you manage your debts. It combines payments to different creditors into one monthly payment. The worth of a debt management plan depends on your financial situation and types of debt. To learn more about a debt management plan, read our guide: Is a debt management plan right for you?

Pros and cons of a debt management plan

Debt management plans have advantages and disadvantages. Below is a balanced view to help you decide if a debt management plan aligns with your debt management strategy.

Advantages of a debt management plan

Understanding the pros of a debt management plan can offer guidance when deciding whether the plan is right for you. Here's a list of the benefits:

Single monthly payment: One clear benefit is that you only make one manageable monthly payment.
Lower interest rates: Many people experience reduced interest rates after entering a debt management plan. However, this isn't guaranteed.
Stopped charges: Creditors may stop additional charges and late fees as part of the agreement.
Reduced stress: Having a plan in place can greatly reduce the stress associated with managing multiple debts.

Disadvantages of a debt management plan

While there are clear benefits, it's crucial to understand the downsides as well. Here are some cons to consider:

Impact on credit score: Entering a debt management plan may affect your credit rating, as your credit file may show reduced payments. This impact can last for several years.
Potential fees: While free debt management plans exist, most companies charge for their services, adding to your cost.
Long commitment: The length of a debt management plan varies based on your total debt and monthly repayment capacity. Some plans may last a few years, while others could extend longer, depending on individual circumstances.
Limited to unsecured debt: Debt management plans usually only cover non-priority unsecured debts, so they won't be a solution for all types of obligations you might have.

Before making any financial decisions, it's important to read reviews of debt management plans. You should also talk to professionals before you commit. Make sure to weigh the pros and cons to decide if a debt management plan is the best way for you to manage your debts.

Can I borrow money with a debt management plan?

Yes, it is possible to get a loan whilst on a debt management plan. Secured loans may be an option. They use your property as collateral to mitigate the risk of the debt management plan.

You can get new credit during a debt management plan, but it is usually harder. It may also have higher interest rates. It is important to consider the implications carefully.

You should always think carefully before getting a loan against your home. This is important, especially if you have debt problems.

Alternatives to a debt management plan

Sometimes a debt management plan might not be the best fit for your situation. In this case, it is important to consider other avenues for managing your debts. Below are some alternatives, each with its own set of benefits and drawbacks.

Each of these alternatives has its pros and cons. As with debt management plans, it's crucial to conduct thorough research and consult professionals before making a decision. With the right planning and administration, you can find the best route to financial stability.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement, commonly known as an IVA, is another way to manage debt. Unlike a debt management plan, an IVA is a legally binding agreement between you and your creditors. IVAs often last for five to six years and can lead to a portion of your debt being written off.

When thinking about debt management and an IVA, keep in mind that an IVA can hurt your credit score more. However, it can also help you write off some debt, which a debt management plan usually cannot do.

Bankruptcy

Bankruptcy is a legal status that can clear most of your debts, but it comes with severe consequences. Creditors may sell your assets to repay your debts, and they will severely impact your credit rating for several years. Despite the drawbacks, bankruptcy could be a good option when other ways to manage debt fail and your debts become too much to handle.

Debt consolidation loans

Debt consolidation loans combine multiple debts into one loan, often with a lower interest rate. The goal is to make your debt easier to manage by having just one monthly payment. These loans can be useful if you have multiple high-interest debts. However, they can potentially lead you into more debt if not managed well. To learn more, read our guide: what are debt consolidation loans?

Tips for choosing a debt management plan provider

Choosing the right company to manage your debt management plan is crucial. Here are some important factors to consider to ensure you make an informed decision.

Fees

While some companies offer free debt management plans, others charge a fee for their service. Understand the cost structure before committing to a provider.

Be cautious of companies that charge high fees, as these can add to your financial burden. Free debt management plan are also available through reputable charities like StepChange and PayPlan.

Customer reviews

Debt management plan reviews can offer valuable insights into the reliability and effectiveness of a company. Look for reviews from people who had similar debt situations to yours.

Regulatory compliance

Ensure that the company you choose is regulated by the Financial Conduct Authority (FCA). This ensures that they adhere to laws and guidelines, providing you with added protection.

Conclusion

Managing your debts is crucial for your financial well-being. Whether you choose a debt management plan, an IVA, or any other debt solution, the key is to understand your options thoroughly. A debt management plan can simplify your payments and potentially reduce fees, but it's essential to weigh up its pros and cons. Always consult professionals for a tailored plan that meets your needs.

At Central Trust, we can offer loans for people with debt management plans. If you're considering a secured loan, speak with a qualified advisor. Contact us free of charge at 0800 980 6273, or complete our enquiry form, and we will return your call at a convenient time.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON YOUR HOME, THE LENDER MAY REPOSSESS IT.