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Credit is a convenient way to fund your expenses without exhausting your savings. But borrowers with multiple debts know the hassle of managing more than one monthly instalment. If you, too, are struggling to repay your debts, then a debt management plan (DMP) can be a huge step towards attaining financial stability. In this blog, let us understand a DMP, its process, and its pros and cons.
A debt management plan is a loan repayment method that allows borrowers to make a monthly payment covering all their unsecured loans. It is important to note that debt management is not a loan, nor is it loan consolidation. Instead, it is a program that credit counselling agencies run to help you pay off your debts.
Here is a detailed breakdown of how a DMP works:
Only credit counselling agencies offer debt management plans, and most of them are non-profit organizations. However, being a non-profit does not mean every agency is right for you. Do your research, read reviews, and only then opt for a credit counselling agency.
Once you select your counselling agency, it will assign you a credit counsellor. A credit counsellor is like a personal financial advisor who will help you with debt repayment. The counsellor will engage with lenders on your behalf. He would negotiate lower interest rates and fees to make loan repayment easier.
Your new personal financial advisor, i.e., the credit counsellor, will go through all your debts and assess your financial condition and create a DMP tailored for you.
All debt management plans cover only unsecured loans like credit card debts, personal loans, income tax debt, medical bills, etc. These loan repayment plans do not cover secured home loan or vehicle loans.
Once you have selected a DMP, it is time to clear your dues. Under the plan, repayment works differently than usual loan repayment. Instead of paying your creditors, you pay installments to your credit counselling agency.
The agency will then do the paperwork and distribute the money to different lenders while you only make one monthly payment.
Here are some benefits of debt management:
1. Your credit counsellor can negotiate a lower interest rate, so you pay less towards interest over time.
2. If you pay for your different loans separately, multiple EMIs can be challenging to manage. You also run a risk of missing payments. But A DMP creates a monthly payment plan, so you only pay one installment to settle all your debts.
3. Over time, regular and timely payments will improve the borrower’s credit score.
Let us see some drawbacks of a DMP:
1. The biggest drawback of a DMP is that lenders may close your credit account that is part of the plan or reduce your credit limit.
2. Credit counselling agencies charge monthly fees for facilitating your debt repayment.
Debt management plans are an excellent option for borrowers struggling to manage multiple debts. The credit counsellor will negotiate better interest rates and charges to help reduce the financial burden. At the same time, you may have to live without a credit card until the loans are paid in full. So, weigh the pros and cons before entering a debt management plan.
Alternatively, you can take a personal loan to consolidate and pay all your debts. At Tata Capital, we offer personal loans of up to Rs 35 lakhs at the lowest personal loan interest rates. Visit our website for a personal loan eligibility check and apply for a loan.
Policies, Codes & Other Documents