How to manage your debts
It can be very worrying and stressful to be in debt. If you’re not sure how to handle it, you could consider a debt management plan.
A debt management plan is designed by a credit counselling agency. This plan is specifically designed for you to get out of debt. A debt management plan helps you negotiate with your creditors to waive a certain amount of fees or lower your interest rate.
Some important things you should know about a debt management plan are listed below.
1. It’s a third-party system
A credit counselling agency that offers debt management plans does not offer a loan to settle your existing debts. Instead, they help you distribute your money to your creditors so that you don’t have to juggle many different accounts. A credit counselling agency has connections and preset arrangements with most financial institutions and helps you pay off debt through interest rate and fee reductions. This way, most of your money goes towards paying out your balance rather than finance charges.
2. It can be used for certain types of debts
A debt payment plan doesn’t work for every type of debt. It is typically designed for your unsecured debts, such as personal loans, medical bills, credit cards, rent, and utilities. Secured debt such as a car loan or a mortgage doesn’t qualify for a debt management plan. It’s important to understand debt management advice and how it can help you manage your debt payments. That is because it may not be an ideal option for those facing severe financial hardship. A debt management plan is more suitable for you if your debt is lower than a typical debt settlement customer.
3. It is not free
The credit counselling agencies offering debt management plans do charge for their services. Typically, they charge a monthly fee or there can be a one-time setup fee. However, this fee is fractional compared with the savings you make from a reduced interest rate. Some credit counselling companies may offer a free consultation but will begin to charge once your debt management plan is in place.
4. You’ll still have to make monthly payments
Keep in mind that a debt management plan only helps you negotiate discounted interest rates. The monthly payments you make to your debt management plan go toward paying your debt. That means you are still obligated to pay the debt you owe. Although your debt is managed by a credit counselling agency, you will still be on the hook for your debt. Your credit counselor will make timely payments every month on your behalf. A debt management plan simplifies your monthly payments by rolling your different outstanding debts into one manageable monthly payment.
5. It takes several years to complete
A debt management plan can take several years to pay off your debt. However, the plan makes your debt payment process smooth and manageable. It can take five to ten years depending on the amount of debt you owe and your financial condition. Typically, a debt management plan takes three to five years and can last for ten years in some cases.