What is a Debt Management Company?
Also known as debt relief or debt consolidation, debt management companies can take your current debts and create a plan that helps you pay them all off in an affordable manner. They provide you with an unsecured loan that all your debt is paid into.
Consulting the advice and help of a debt management company is only recommended for those who are experiencing the following:
- County Court Judgements (see CCJ loans)
- Bankruptcy
- A number of outstanding credit card debts (logbook, guarantor or payday loans, for example)
- A spiralling amount of debt
Therefore, if you have just one or two loans or credit cards outstanding, then it is not necessarily needed for you to seek the advice of a debt management company.
How does debt management work?
A debt management company will ask for details of all your current outstanding debts, in order to form the basis of a debt repayment plan. This plan will effectively put all your debt into a single loan, that you will then pay off monthly.
The idea behind this is to avoid you having to contact each and every lender to set up a payment plan (which may be overwhelming and stressful). It also means you don’t have to keep in mind a number of different payment dates every month.
Instead, you pay all your debts at once, in one payment plan, on one date each month.
Your income and expenses will also be assessed when calculating how much money you pay each month to pay off debt. The debt management company will apportion money that you can spend on food, mortgage repayments, utilities and so forth.
What else does a debt management company do?
A debt management firm can also negotiate a payment plan on your behalf with your lenders.
They can ask them to freeze the interest to make paying back the outstanding money easier and more affordable for you.
Do debt management loans cost money?
Yes, a debt management company will charge you a small amount extra to cover the cost of managing your debt.
What is an unsecured loan?
Unsecured loans, such as a debt management loan, mean that the borrower is not required to put any high-value assets as collateral for the loan. In most cases, this is your car or property.
Loans where you are required to provide collateral are called secured loans, and can pose a significant risk if you fail to keep up repayments. The lender has the legal right to possess these items if you miss a number of repayments.
What are the pros and cons of debt management loans?
The main advantages of a debt management loan are as follows:
- Less stressful, as your debt is consolidated into one single loan
- An organised, systematic way to clear your debt
- You will eventually be debt-free
- No need to worry about lenders and debt collectors chasing you up for payments
The pitfalls of getting a debt management loan could be that:
- You will need to keep to a rigid repayment schedule for a long period of time
- You will need to pay a fee to a debt management company
- Requires a stable income to keep with the repayment plan
Are there alternatives to a debt management loan?
Yes, if you are concerned that you are spiralling into debt but would like to consider other options other than a debt management loan, they exist.
For example, you could speak to debt advice services like Citizens Advice Bureau, who can help you to organise your debt and provide impartial advice to get back on track.
You also can create your own debt consolation loan plan. Simply organise your existing debts, arrange payment plans with the lender directly and put aside money each month for essentials. You can do this on a spreadsheet on Excel.
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