Debt Management is a system to help those in debt become debt free. And a Debt Management Plan (DMP) is a process to help free you from that debt. And is typically taken out when debts are below 15,000.
You pay a single monthly sum to the company who run the DMP and they in turn pay off your creditors with an agreed amount. This means all the debts are consolidated into a single, affordable payment. Not only are they consolidated into one payment but that payment can be up to 75% less than you'd normally have to pay. This is due to the fact that the creditors know there is a debt management company working on your behalf and the debt management company can work with the creditors to lower or freeze the interest rates on all your debts. Also, you don't have to deal with the creditors anymore so you can relax and not worry about stressful demand letters and/or calls.
The monthly payment you make is based on your current income and expenditure. This means that living expenses such as mortgage, phone and food are removed from your income and you then pay what you can afford from the remaining amount.
Difference between debt management and debt consolidation
The reasoning behind a debt consolidation loan is that if a person owes money to multiple creditors, they then borrow a lump sum to repay their creditors, leaving one creditor and one lower monthly repayment. The idea is that the repayments on the consolidation loan will be lower than the sum they are currently paying across all of the other debts. Also, the interest rate on the consolidation loan can be lower than that charged by the other lenders, especially of the main debt is credit card debt.
A consolidation loan works very well if you can easily afford the monthly repayments and you are just looking for a way to simplify things and also bring down the interest rates. However, there are many people that struggle to meet all the repayments each month. And some may even find that their outgoings each month exceed their income. These people are classified as being in debt and a debt consolidation loan will not actually get them out of debt and will not alleviate the problem.
A debt management plan is a method for reducing their debt and allowing them to become debt free. It will consolidate all their repayments into a simple monthly payment and it does not involve them taking out another loan.
Conclusion
Depending on your financial circumstances you will need to consider at least debt management or debt consolidation. Also if your debts are over 15,000 you may also want to consider an Individual Voluntary Arrangement (IVA). Whatever your level of debt you need take your time before deciding on the best and right option. Choosing the wrong one, in haste, may put you further into debt so choose your debt help option carefully.
Paul Hockney is an online loan expert who provides help with debts.
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