Advantages and disadvantages of debt management

Posted by admin under Debt

If your unsecured debts have become unmanageable and you can no longer afford your monthly payments, a debt management plan could help. It works by making your repayments affordable again and giving you a realistic path to becoming debt-free.

But like any debt solution, a debt management plan has its advantages and disadvantages. As such, you’ll need to weigh up whether it’s the right solution for you before you start.

Advantages of a debt management plan

It reduces your debt repayments to an affordable level

If you can’t afford to repay your unsecured debts alongside your other essential costs, your debt management plan will bring your debt payments back down to a manageable level.

Your unsecured lenders will be asked to accept lower monthly payments, based on what you can afford after your other essential expenses (mortgage/rent, utility bills, etc.) have been covered – so you should be able to afford all your commitments.

Interest and other charges may be frozen

In many cases, your lenders may also agree to reduce or freeze interest and other charges. This can stop your debt from getting any bigger, and as such your debt can be cleared more quickly than it would if it was still accruing interest.

It can change with your circumstances

Because it’s an informal agreement, it’s quite possible to change the terms of your debt management plan if your circumstances change. For example, if your income increases, you can start paying more towards your debts; similarly, if your income falls, you may be able to have your debt management payments reduced.

However, if your income falls significantly, you may find the debt management plan is no longer suitable – in which case you’ll need to look at alternative solutions.

Disadvantages of a debt management plan

It’ll affect your credit rating

If you’re not repaying your debts the way you originally agreed, your lenders may register defaults on your credit rating. This will be recorded on your credit history for six years, and could make borrowing money more difficult – and potentially more expensive – in that time.

You won’t have much money to spare

The idea of a debt management plan is that you pay as much as you can afford, so you’ll be left with little money for anything except essential costs. This will remain the case until your debt management plan ends.

It’s not legally binding

The downside of a debt management plan being an informal agreement is that your lenders aren’t committing to keep on accepting reduced payments until the day the debt is completely cleared.