If you are having a problem managing your debts you may be tempted by one of the many adverts for debt management companies which are always in the newspapers and on TV. But before you reach for the phone you need to understand what services these companies offer and are they right for you and your specific problem. But first of all, time for a reality check
- Any debt or debts you have will have to be repaid one way or another so nobody is going to wave a magic wand and make your problem disappear.
- Secondly you need put into action the tips given on this site about debt management/budgeting and try to deal with the issue yourself, it is the best way.
- Finally you need to bear in mind that any help provided by a 3rd party will cost you money. There is no such thing as a "free lunch" and fees will be charged for the services of debt management companies.
So, if after trying to solve your own problems you are sure that you cannot survive with your current debt burden then a debt management company may be a solution. I must, however, point out that my definition of "cannot survive" may well be different to yours. My view is that so long as you have food in the cupboard and a roof over your head then pretty much everything else is a luxury when faced with a crippling burden of debt.
Now, let's have a look at what's on offer from these companies. The services offered fall into two main categories which are as follows.
This is where the debt management company will contact all the companies to which you owe money and negotiate a new payment plan. Most loan or credit card companies will agree to a reduced monthly payment rather than have you completely default on the debt and may, in some cases, freeze or reduce the interest being charged. If agreement is reached then your monthly payments will reduce but obviously this means it will take longer for you to pay off any loan.
One downside of this approach is that your credit rating will be damaged. This is because in order for the debt management company to renegotiate with the companies you owe money to they need you to stop paying them. In doing so your missed payments are reported to the credit agencies by the lenders, so damaging your credit score. At this point the lenders will then be open to renegotiations. The trouble is that you might not be aware of this because the debt management company will have been taking monthly repayments from you from day one. But these payments (typically the first 3-4 months) go straight into their pockets while your debts go unpaid!
Obviously once the renegotiations take place and full agreement is reached your monthly repayments to the debt management company will eventually be divided up amongst all the companies to which you owe money. After the management company take their monthly management fee, of course.
This is where a new loan is arranged by the debt management company which is enough to pay off all your debts. This new loan is normally over a longer term than your current loans to enable the monthly payments to be reduced. Obviously whilst this may be a short term solution, long term you will still be burdened by debt. The new loan is also likely to be secured against any property you may own as an added security for the lender. So your home will be at risk if you default. The debt management company will receive a fee from the new loan company for arranging this loan.
So, hopefully you are now a bit clearer about what's on offer and debt management companies can be helpful in difficult cases. I would, however, encourage you to research the debt/budgeting advice contained on this website and also talk to someone like Citizens Advice before you consult a debt management company. Debt management companies really are a last resort as they can wreck your credit rating or put your home at risk. They shouldn’t be used to reduce your monthly repayments so you have more money each month for clothes shopping!