Finding the right debt solution for your circumstances can be difficult. Each one is designed to help people in different circumstances and with varying levels of debt – so which do you choose?
Here we take a look at two of the most common debt solutions – debt management plans and debt consolidation loans. There are key differences between the two which mean they are more suitable for people in different situations.
Debt management plan
A debt management plan is aimed at people who can’t afford their unsecured debt payments. It’s an informal arrangement with your unsecured lenders in which your debt repayments are brought back down to a manageable level.
Your lenders are under no obligation to agree to this, but may do so if they can see it’s the most realistic way for them to get back everything they are owed.
It’s also common for lenders to agree to freeze or reduce interest and other charges on your debts (although again, there is no guarantee). This can stop your debts from getting any bigger, and it means you can clear your debts more quickly than you could if they were still accruing interest. If your lenders don’t agree to this, note that repaying your debts more slowly will cost you more in interest.
Your debt management plan may carry on for as long as it needs to – either until you can afford to make your regular repayments again, or until your debts have been paid off in full. However, note that your lenders don’t have to stick to it right up to the day your debts have been cleared.
Is it right for me?
Your lenders will only accept a debt management plan if they can see it’s the most sensible option for everyone involved. You’ll have to demonstrate that your existing repayments are unaffordable, but that you can still afford to make regular (reduced) monthly payments.
Plus, be aware that repaying your debts more slowly means you’re not sticking to your original repayment agreement, and this can show up on your credit rating for six years, potentially making it harder and/or more expensive to borrow more money.
Debt consolidation loan
A debt consolidation loan is designed to help people who aren’t struggling, but simply want to rearrange the way they pay their debts and/or reduce their monthly payments. By paying off your existing debts with a new loan, you effectively ‘consolidate’ multiple debts into one, which can make your debts easier to manage.
You may also be able to reduce your monthly outgoings by repaying the loan over a longer period of time. But keep in mind that doing this will also mean paying interest for longer, and you could pay more overall as a result.
However, if your debt consolidation loan has a lower interest rate than your original debts, you may still find you save money in the long run.
Is it right for me?
A debt consolidation loan is a way of rearranging the way you’re repaying your debt – it’s not a way of tackling unmanageable debts. If you’re struggling, you should avoid taking on another loan, as it doesn’t actively help to reduce your debts.
But if you want to simplify your finances and/or reduce your outgoings, a debt consolidation loan could be what you’re looking for. As with any loan, just make sure you can afford your repayments before you commit yourself.