Have you thought about the debt management program pros and cons to get out of debt? Many folks who have high-interest unsecured debt resort to enrolling in a debt management program (DMP) to solve their financial problems. This option can help reduce the interest rates on your debts and lower the amount you’re paying every month.
For sure, this sounds great, but there are also a handful of drawbacks to a debt management program. It’s crucial to take stock with your financial situation before you enroll in a DMP. Plus, you need to understand how this debt settlement option works and know its upsides and downsides. Read this blog post to learn more about debt management programs.
What is a Debt Management Program?
A debt management program is an agreement made between a debtor and creditors to lower the monthly payments and interest rates on a debt/s. It’s one of the best debt solutions today because it allows you to work with a credit counseling agency, who will give you expert advice and negotiate with your creditors on your behalf to make your debt easier to repay.
If you’re enrolled in a debt management plan, you have to make a deposit every month to the credit counseling organization. These monthly deposits go towards paying off your debts based on a repayment scheme agreed between your credit counselor and creditors. Typically, debt management programs can take three to five years to fulfill.
Non-priority or unsecured debts – which are money owed that are not backed by collateral – can be included in a debt management program. You can include your credit card debts, student loans, bank loans, utility bills, and medical bills in a DMP.
The Debt Management Program Pros and Cons
Review the advantages and disadvantages before you make a final decision. Speaking with a financial expert can help you make an informed decision.
Pros of a DMP
Debt management plans are among the go-to debt-relief options due to their advantages. Here’s a list of pros when you enroll in a debt management program.
There’s Only a Single Monthly Payment
If you’re indebted to multiple creditors, you’ll find yourself in a situation where you have to make multiple payments every month. A debt management program saves you from this hassle because your debts from multiple creditors are merged into one monthly payment.
You will deposit a fixed sum of cash per month to the credit counseling agency, and then the agency will distribute your payment to your creditors. In this way, you can easily keep track of your payment schedule and you won’t stress yourself any more about late payments. Yes, this more streamlined way of paying off debt is one of the reasons why many people prefer DMPs.
You Won’t Get Disturbed By Phone Calls From Your Creditors
Debt management programs offer you some relief from annoying phone calls from your creditors. Once your creditors enter into an agreement through a DMP, they will be more confident that you’ll repay your debts. As such, they will stop contacting and harassing you.
Furthermore, your credit counselor will be the one to discuss and negotiate with your creditors regarding the proposal to reduce your debts. So, you can expect that the whole process will be taken care of professionally.
You Can Avail Of Affordable Interest Rates
Credit counselors have the expertise and knowledge when it comes to negotiating with creditors to make your debt payment more affordable. When you enroll in a debt management program, you can avail of lower interest rates through a successful negotiation by your credit counseling agency.
Exorbitant interest rates on your unsecured debts can drastically increase the amount you have to pay every month. But, with a DMP, the lower interest rate on your debt will reduce your monthly payment.
A DMP Helps You Pay Your Debt Faster
The good thing about reduced rates of interest is that you can easily budget your money for your debt payment. In such a case, you can pay your monthly payments consistently, and pay back your debt in full faster. Debt management programs have an average lifespan of three to five years.
It Can Improve Your Credit Over Time
A debt management program can affect your credit score in the long run. Initially, it will have a negative effect on your credit reports because you’re paying less than the amount of your original debt. But most people who tried this debt relief option have seen their credit scores improve two years after they have paid their debt obligation.
Cons of a DMP
As mentioned in the introduction of this article, debt management programs have their downsides. Read on below to learn about these disadvantages.
The Credit Cards Included In The Program Must Be Closed
Your credit counseling agency will require you to close the credit card accounts included in your DMP. This measure is to prevent you from incurring more debt while you’re paying your current balance. It also makes sure that you’re utilizing the DMP’s benefits for its original purpose.
It’s also not recommended to use credit cards that are not in your debt management program, except when you use it for emergency expenses.
Not All Of Your Creditors Will Agree To Participate In A DMP
Creditors have their reasons to participate or not in a debt management program. So, you can expect that some will agree with the proposal under the DMP, and others won’t. So, it’s crucial to work with an agency that knows the nuts and bolts of a debt relief negotiation to ensure that most of your creditors will agree to the proposal.
There Are Scammers
Debt management scams exist, and you can be a victim if you don’t know how to pick a trusted credit counseling agency. So, make sure that the agency has received accreditations from the relevant accreditation entities in your country. You should also check reviews about the agency or any complaints against it.
Steps to Getting a Debt Management Program
Once you’ve decided that a debt management program is the best option to solve your debt issues, just follow these steps to enroll in a DMP.
- Go to a non-profit credit counseling agency.
- Inform your credit counselor about your debts, income, and anything relevant to your financial situation.
- The credit agency will set a debt management plan that suits your financial situation.
- Your credit counselor will go into a negotiation with your creditors.
- Sort out your budget and be consistent on making payment on your DMP.
A debt management program can be a good option to consolidate your unsecured debts and reduce the interest rates on them. If you need additional resources on this topic, you can visit sites like debt.ca for that purpose.