Debt management plans or DMPs are designed to make it easier for debtors to repay multiple debts that have grown beyond their financial capacity to pay. It basically consolidates all the loans of a debtor, giving him the benefit of repaying all his debts in just one monthly bill.
This is a type of management solution that is permitted in several countries including the United Kingdom, USA and Canada. Those who find themselves in a tight spot as far as finances are concerned can apply for debt management plans from reputable financial institutions (in UK the government plays a huge part in DMP services).
Purpose of Debt Management Plans
DMPs are only possible for unsecured debts. Government and private financial institutions that offer DMPs will serve as the third party who will negotiate the new terms of loan repayments between the debtor and the lending companies.
It is the job of the DMP institutions to study the overall financial situation of the debtor. Based on his income, expenditures, outstanding loans, and maybe several other factors, the DMP institution will study the most suitable and possible payment terms for the debtor.
The Core Strategy of Debt Management Plans
Here is a rough overview of how the consolidation of debts through companies is done.
The amounts owed by the debtor for each loan is summed up while the interest rates are negotiated for you by the debt management institution. They will endeavor to reach an agreement with the lenders and provide the debtor with a new interest rate that is lower than the average of all interest rates. These two values, the average interest and the total debt, will be what the debtor will be paying from now on.
Here is an example of how this is done:
Loan A: 10% interest
Loan B: 10% interest
Loan C: 20% interest
Average interest: [10% + 10% + 20%] / 3 = 13.33%
Loan A: ?500 outstanding debt
Loan B: ?1,300 outstanding debt
Loan C: ?700 outstanding debt
Total debt: ?2,500
The debtor and his debt advisers will apply for a cumulative interest rate less than 13.33%. This will allow him to have a reduced monthly payment, albeit on longer terms.
What You Can Expect from Debt Management Plans
Debtors get the luxury of making one payment per month for all pending loans. In line with its main purpose of providing feasible solution for debtors experiencing financial difficulty, the debtor will now be paying less per month for an interest rate. This is the result of averaging the interest rates of multiple loans.
On the other hand, the terms of the loan will be extended for as long as 30 to 60 months. Being under a debt management program will also reflect on your credit record, which might affect your eligibility to apply for other credit in the future. However, for as long as you are religious and consistent in paying the new monthly dues arranged through DMP, your chances of being considered for future loans will be much higher.
This money management service does not come very cheap, nor is it a requirement for indebted individuals. However, debt management plans remain to be wise and effective solutions for debt problems.
Find out more information on debt management plans at http://www.debtmanagementuk.co.uk/ and get yourself free from debt now!
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Source: http://kiss101.net/an-overview-of-debt-management-plans/
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