One kind of debt helps you build wealth and acts as a stepping stone towards better financial health. And then there is another kind of debt that can leave you juggling bills and starts to affect your financial freedom so much that you lose sleep over this.
Many credit counselling organisations offer a debt management program as a solution for people struggling with paying unsecured loans (mainly credit card debt). This plan ensures you pay one monthly payment, based on your budget, for all of your debts at a low-interest rate. The right counselling firm will ease the process for you by negotiating on your behalf with the creditors and getting the interest down to a reduced rate or sometimes even to zero. If you are new to debt counselling, it is essential to understand how the process works to choose whether to go ahead with this or not.
What is a Debt Management Plan?
It is a type of repayment plan managed by a credit counselling agency. Before getting started with the program, a counsellor will review your financial situation and analyse whether you are an excellent fit for this plan or not. If yes, they will negotiate with all of your creditors on your behalf to draft new payment plans.
Choose a credit counselling agency that goes out of its way to educate you about the options available and provide assistance to help you better manage your finances. They may get the creditors to waive fees and lower the interest rate on your accounts. If everything goes according to the plan, you will be debt-free within 3-5 years, which will be easier for you considering less interest will be accrued each month.
Important Aspects to know
- It is a voluntary plan; that is, the creditor can choose not to be a part of the Debt management plan, and likewise, you can also choose which creditors you want to include in this plan or not.
- You will make a single payment to the credit counselling agency, not the bank anymore. The agency will then distribute the money to your creditors. To manage this plan, they will charge you a small monthly for the service, but the interest you will be saving could cover the cost.
- A debt management plan is not a debt consolidation plan. Under the latter, a new line of credit is borrowed to repay the old debt. In this plan, your creditors simply agree to new terms of your existing debt.
Advantages of Choosing Debt Management Program
Borrowers struggling with their bills may find the program a sense of relief from all the other available debt options. Here are a few advantages of choosing a debt management program:
- Professional advice and a financial counselling session with a credit counselling agency you choose help you become a disciplined person when it comes to credit.
- You will be out of debt sooner than you realise with a debt management plan. With low interest rates, a large portion of your payment goes towards the principal balance.
- By choosing a Debt management program, the credit counselling agency will keep you accountable for your financial decisions. This will help you pay off your debt quickly according to the plan.
- You will be getting fewer calls from collection agencies as they too will be assured that you will pay back the amount within the stipulated period.
Getting started with a Debt Management Plan has its share of advantages; it helps you lower your interest rates and monthly payments and avoids the negative impact of defaulting or declaring bankruptcy. It can offer you a practical solution, especially if you feel overwhelmed that your debt balance never seems to decrease.