Debt management usually applies if you are struggling with paying back loans, mortgages, credit cards and other applications for credit that you have made. You may be tempted to take out further credit in order to pay off your outstanding debts, however this is not recommended, as it can end up leading you into further debt as a result.
Not taking important factors into consideration such as late fee charges and accumulated interest on top of the existing amount you need to pay back can lead to further troubles. This is why before approving any loan applications, at MoneyBoat and as a UK direct lender, make our own lending decisions and so we check that a loan will not cause a person to fall further into a spiral of debt.
Nevertheless, if you are having issues with repaying your debts, there are ways to get yourself out of the situation, for example, by taking out a bad credit loan (potentially to consolidate existing debts) or undertaking a debt management plan.
What is a Debt Management Plan?
A debt management plan is an agreement between you, the borrower and your creditors to pay all of your unsecured debts. This may sometimes be mediated by a debt management company. Debt management plans are less suited to those experiencing difficulties with for example just one or two outstanding credit card or loan payments. Rather, they are more suitable if you are in one of the following situations:
- You have outstanding County Court Judgements (CCJs)
- You have outstanding mortgage or credit card payments
- You have been declared bankrupt
- You have numerous loan repayments outstanding
- With outstanding debts, you have been declined for a loan or other form of credit
The debt management company consolidates all your outstanding debts into one single plan which is then paid off each month. The company will also apportion money for other necessities such as rent, bills, groceries and travel expenses.
Who Can Help Me with a Debt Management Plan?
You can arrange a debt management plan with your creditors independently or with the help of a third-party debt management company authorised by the Financial Conduct Authority (FCA). It may be the case that you are actively approached by a debt management company, in the event that you have been unsuccessful when applying for a credit card or loan. Many people obtain these plans via government approved companies or from charities such as CallCredit.
If you arrange a plan through a financial company you will be charged a fee for the service. You will make payments to the company regularly and these will then be shared between your creditors until the debts are repaid.
Why Would I Choose a Debt Management Plan?
There are a number of reasons as to why you may decide to consult a debt management company to put together a plan, designed for you to pay off your debts. There are however, a number of well-established and ‘typical’ reasons for doing so:
- Most creditors reduce your monthly payments, interest rates and may even eliminate late fees. This means that you are repaying the debt over a longer period of time and so the demand on your finances reduces each month
- You only need to make one consolidated payment for all your unsecured debts
- It stops creditors’ collection activities due to the agreement made between the debt management company and creditors. This means that you may in some cases be able for example to pause a repossession order on your property or vehicle by agreeing a payment plan
- There is less of a negative impact on your credit score as the debt is still repaid in full. However, having to use a debt management company in the first place is likely to have a detrimental impact on your credit rating anyhow
What is a Debt Consolidation Loan?
The money you receive when taking out a debt consolidation loan is used to repay your existing unsecured debt; transferring the money that you owe into one manageable payment made on a monthly basis. Whilst you will still be required to pay back outstanding debts, a consolidation loan will enable you to reduce your monthly outgoings, as well as pay a lower rate of interest across all your debts, making things far more manageable for you in the short term.
What is the Difference Between Debt Consolidation Loans and Bad Credit Loans?
Although both debt consolidation loans and bad credit loans are often suitable for similar people, there are a few differences. Debt consolidation loans are sometimes secured against a high value asset such as a vehicle or your property. This is because the amount owed may be more than what an unsecured loan could provide. Moreover, these loans are designed specifically for debt consolidation purposes and little else.
Bad credit loans on the other hand, although often suitable to similar borrowers that may otherwise seek a debt consolidation loan, are designed for people with poor credit ratings. As in the case of payday loans, the purpose of the loan can vary a little bit more than in the case of a debt consolidation loan. However, many people who take out loan for bad credit, do often use the loan to consolidate or pay off outstanding debts which are otherwise contributing to a negative credit rating.
Who Can Help Me with a Debt Consolidation Loan?
Provided you have fairly decent credit rating, and several other factors are satisfactory to the lenders, debt consolidation loans can be obtained from banks, credit unions and various other financial companies and credit providers.
Why Would I Choose a Debt Consolidation Loan?
If you are careful about the way in which you manage your spending, debt consolidation loans can help in a variety of ways:
- You only have one monthly payment to worry about
- You will most likely receive a lower interest rate which saves you money and there usually aren’t any fees if you borrow money from a bank or credit union
- It reduces stress, as although your debt has not disappeared, it is definitely less stressful having to deal only with one creditor as opposed to many all at once