What will a debt management plan cost me?

For anyone who’s in debt and looking for a way out, “What will it cost me?” is a major consideration. There’s no point entering a debt solution if the cost is more than you can reasonably afford.

This is one feature of a debt management plan that can make it a realistic approach to unmanageable debt. It shouldn’t require the borrower to pay more than they can actually afford on a monthly basis – and it shouldn’t ask them to use money they need for things like mortgage payments.

How does a debt management plan work?

A debt management plan is an agreement between a borrower and their unsecured lenders. If they can’t maintain their debt payments at the level they agreed to when they took on the debt, their lenders might agree to accept smaller monthly payments. They don’t have to, however, so they’ll expect to see proof that this really is the best way for the borrower to repay their debt.

If they do agree, the borrower simply starts making those lower payments. They might pay their lenders directly, or they may do so through a debt management company. Please note that the debt management company may charge for its services, so it’s very important that borrowers understand exactly what those services would be before they commit themselves to a debt management plan with that company.

Assuming the borrower and lenders are content with the way the plan is working out, this can simply continue until the debts are repaid, or until the borrower is able to make the original payments again.

Making smaller payments does, however, mean that the borrower isn’t sticking to the original repayment agreement – and lenders may decide to issue a default notice as a result. This can make it harder and/or more expensive to obtain further credit while this stays on your credit record.

What does a debt management plan cost?

The actual monthly cost of a debt management plan depends on ‘disposable income’. This is the portion of the borrower’s income which is left over after they’ve accounted for all their essential expenses (priority debts and day-to-day living expenses) but before they’ve made their payments towards their non-priority debts (credit cards, store cards, unsecured loans, etc.).

After all, those payments would be instead of (not as well as!) the payments the borrower has been making towards their non-priority debts. Their non-priority creditors would be paid out of the payments that go into a debt management plan.

Will it cost more in interest?

Normally, repaying a debt more slowly does mean it’ll cost more in interest – the debt will be around for longer, so it will have more time to accrue interest. However, what often happens is that lenders will agree to freeze interest on debts while the borrower’s on a debt management plan. Again, they don’t have to, but if they can see it’ll help the borrower repay the money they owe – and help make the debt management plan a success – they may well do so.