It is common to take out loans or mortgages to improve your living standard, and these debts must be repaid. However, if you struggle to make payments due to high-interest rates or regular fees, you need a debt management plan (DMP) tailored to the interest rates you can afford.
In this article, we discuss everything you need to know about debt management programs and how they can help you pay off your debt.
What are DMPs?
Typically, this is some form of arrangement your advisor helps you make with your creditors, where the DMP either consolidates all non-priority debt into monthly payments or makes installments based on what you can afford. With this plan, you can slowly reduce your financial obligations and get them back on track and in balance. A financial or DMP provider curates these DMPs on your behalf.
What is non-senior debt?
Non-priority debt includes store cards, credit card bills, and various types of loans. Also, you need a minimum amount (which varies by creditor) to be eligible for DMP.
What debts can a DMP pay off?
Here are some non-senior debts that you can pay off with a DMP.
l Personal Loan
l Overdraft
l Friends and family loans
l Loans from banks or housing societies
l In-store and home loan debt
l Credit card loan
What debts are not covered by the DMP?
Below are some debts not covered by the DMP, commonly called senior debts.
l TV license
l Utilities
l Fine
l When you purchase necessities under an installment agreement
l Council tax
l Mortgage, rent, or loan you buy for your home through the bank
l Maintenance of child support
l VAT, income tax, and social security
How can you get DMP?
Many organizations can help you become familiar with DMP and provide better support. Also, they can arrange a suitable DMP according to your requirements; some of these organizations won't even charge you a penny.
Ensure that any free support staff you contact is authorized by the Financial Conduct Authority or the FCA, as they must meet agreed industry standards.
What are the benefits of DMPs?
As we mentioned before, a DMP is a powerful tool that can help you get your financial commitments back on track; some of the benefits are as follows:
l Financial Relief - You have to pay once a month instead of multiple payments. This one-time payment eases your financial burden and frees up money you can save or spend on necessities.
l Reduces Stress - You no longer need to spend time tracking multiple expenses, only pay once a month. This takes a lot of pressure off your shoulders.
l Less communication - no more regular reminder calls before deadlines.
l Forgiveness or reduced interest rate – Ask your advisor if they can help you reduce your finance costs and get a reduced interest rate to pay off your debt faster.
Are there downsides to DMPs?
Below are some disadvantages.
l They only work for non-senior loans and payments.
l You can apply for a loan only after you have paid off your debts through DMP.
l Creditors need to be involved, and this is where the advisor's expertise comes into play.
l Payments may take longer as the amount will decrease each month.
l As indicated by the DMP on your credit report, you may not be able to get credit in the future.
Are there good alternatives to DMP?
Ultimately, you should look for the best solutions and improve your spending habits to pay off your debts. Before proceeding, first, evaluate your plans and options. Here are some options to consider.
50/30/20 rule
This rule allows you to set aside 50% of your income to pay for essentials like utilities, rent, and mortgage. 30% is used for all your needs, such as going out, entertainment, etc.; the last 20% is used to pay down debt. This way, you can start saving or balancing your finances with little effort.
If your debt exceeds 15% of your annual income, switch to the other two options.
Debt avalanche act
With this method, you pay off your debt at the highest interest rate first and then pay the next debt at the highest interest rate. This approach requires discipline and can help you navigate the most demanding financial commitments.
Debt snowball
This is where you go for the most manageable payments or lowest interest rates. This approach will help you get out of some debt quickly and allow you to continue paying off your financial obligations.
Central argument
Credit card debt is more common and a problem for older adults, who may need more income from work at this age. In addition, their medical expenses will increase due to a lack of medical insurance. Still, it can be embarrassing because of other people's circumstances, and a DMP can take some of the stress out of their lives.
Understanding the pros and cons and publicly available information about DMP can help you decide which DMP approaches and alternatives are available and which might be best for you.