A debt management plan can be an effective way to gradually repay your unsecured debts to multiple creditors.
By talking to a debt management consultant, they can help you: Assess your ability to repay, negotiate with creditors, and combine multiple debts into one monthly repayment. Also, they may be able to reduce, or waver, any associated fees or interest.
There are, however, many advantages and disadvantages to a debt management plan. By knowing what those pros and cons are, this can help you decide if the plan is right for you. Let us cover the positives first.
- A debt management plan is a formal agreement between a debtor and their creditors, which is prepared and managed by a debt management firm.
- Under a debt management plan, a debtor agrees to pay a minimum amount of money once per month, which is dispersed to your creditors.
- A debt management plan can help you simplify the debt repayment process and regain control of your finances.
- A debt management plan may not work if you rely on credit or cannot meet consistent repayments.
Advantages of Debt Management Plans
There are many advantages to a debt management plan. They can help you simplify the debt repayment process, save you money, and pay off your debts faster. Also, if your circumstances change, you can usually update the plan to suit your needs.
Here are the many ways a debt management plan can work in your favourite.
1. Simplify Your Debt Repayments
With a debt management plan, you can consolidate all your debts into one monthly payment. Thus, you only make one payment each month, which is evenly dispersed to your creditors.
This can make budgeting easier, as you will know exactly how much money you need to make a payment, and how much money you will have leftover.
2. Save You Money
Your account manager will work with you to help you save money. They may negotiate with your creditors to try to reduce, or even waver, the amount of interest or fees tied to your debts.
Do you have credit card debt? Your account manager can help you transfer the debt to a balance transfer credit card. A balance transfer credit card has a low or zero interest introductory period, which lasts for 12 to 30 months depending on the provider.
During the introductory period on your balance transfer credit card, you will pay little to no interest on your repayments. Which means, if you can pay off the debt before the introductory period ends – i.e. the interest rate rises – then you could save money.
3. Credit Card Balance Transfer
If you have a high interest credit card, then you could transfer the balance of your credit card to a new card with a zero or low interest introductory period. Then, pay off as much of the credit card debt as you can before the introductory period ends. You can also do credit card debt consolidation by combining multiple debts into one.
If done right, you could pay considerably less interest than if you stayed on the same credit card. Just make sure you read the fine print, and that you know what the interest rate will be once the introductory period ends. Watch out for hidden fees like account setup and account management fees, too.
Disadvantages of Debt Repayment Plans
While a debt repayment plan is a great way to get your finances in order, they are not for everyone. In some cases, a debt management plan may not be suitable. Watch out for these pitfalls.
Reduced Access to Credit
If you rely heavily on credit, take pause. Because under a debt management plan, you are required to close one or more credit accounts, so you cannot use a credit card or apply for a new one.
If this concerns you, then consider a debt consolidation plan, as this will let you maintain access to credit.
1. Uncooperative Creditors
A debt management plan only works when everyone is on board. So if you have multiple debts, and not every creditor agrees to the plan, then that can make repaying what you owe harder.
Also, since debt management plans are informal agreements, creditors can change their mind at any time. Although these instances are rare if you are consistent with your payments.
2. Must Make Consistent Repayments
Sticking to a debt management plan can be challenging, especially if your circumstances change. You could receive a pay cut, lose your job, or face a sudden emergency bill. When these events occur, they can increase the odds of missing payments.
That’s why, you should tell your account manager when your circumstances change. They can notify your creditors and have them agree to a modified plan. They may be able to temporarily lower your monthly payment amounts, at least until your situation improves.
3. Understand Your Debt Repayment Options
Trying to juggle multiple debts at once can be stressful, but there are steps you can take to turn things around.
One thing you can do is talk to a Debt Fix debt management consultant. They can help you assess your finances, figure out what you can afford to repay, negotiate with your creditors, and create a debt management plan that is fair and reasonable. Also, there is no obligation to accept the plan, especially if it does not sit right with you.
Hopefully, you now have a better understanding of the pros and cons of debt management plans, and that you use this info to take the next step in your debt relief journey with confidence. Want to learn if a debt management plan is right for you? Schedule an obligation-free consultation with the Debt Fix team now.