People with debts know they have to repay them - but that doesn't mean they know how they'll do that. Two of the debt solutions that have become well known in recent years are debt management plans and debt consolidation loans. So what's the difference between them, and what kind of borrower are they likely to help?
A debt management plan ( read more ) is an agreement between a borrower and their lenders (not their secured lenders, but their unsecured lenders, such as credit card providers and banks providing overdrafts and unsecured loans).
Basically, those lenders will be asked to accept smaller monthly payments, since the borrower can't afford the repayments they agreed to make when they originally took on the debt.
The idea is to agree on payments that the lenders think are realistic - and that the individual can afford without using money they should be keeping for their monthly essential expenses, from mortgage / rent payments to food bills, utility bills, essential transport costs and so on.
It they can reach an agreement, the borrower can start making those smaller payments - and keep on making them until their debt is paid off or until their financial situation improves enough for them to start making higher payments again.
However, lenders don't have to agree to a debt management plan. And if they do, they don't have to agree to freeze interest and waive charges (although lenders will often do this if someone's on a debt management plan). Just bear in mind that repaying any debt in smaller instalments means it'll take longer to repay - so if interest isn't frozen, it'll add up to more in the long run, since it'll have longer to accrue.
Nonetheless, this would be likely to happen anyway if the individual can't afford to make the payments they originally agreed to. Similarly, repaying the debt more slowly can damage someone's credit rating, whether they enter a debt management plan or not.
Having said that, debt management can be a good way for someone to repay their unsecured debts at a slower rate that they can realistically afford - with their lenders' consent. It also means they can do this without using up the funds they need for things like their mortgage payments.
