Minimum payments only When DMP is right choice
Summary: Minimum payments only - This paper examines why some people opt for a Debt Management Plan (DMP) due to very high interest rates in the debts they have incurred.
A vicious circle
Credit cards, store cards, catalogues and payday loans can and usually do incur high interest charges. Making minimum repayments on the debts is likely to meet the interest charges but make little or no inroad to the actual debt. People faithfully make the required payment each month but are consigned to what feels like (and could actually be) a lifetime of such repayments. They simply cannot afford to make more than minimum repayments. (In the case of payday loans it may be that they have to keep taking out new loans).
Breaking the circle
For some, once minimum payments have been made on debts they still need to rely on their overdraft or start building up a new card or loan because they cannot meet all other expenditure requirements. The only way to break the circle of credit dependency is to enter into a DMP. A DMP enables the debtor to make one affordable payment to cover all debts and very often creditors will agree to freeze interest charges enabling the debtor to start repaying the capital owed.
DMP - a preferred option
By repaying the capital, debtors can start predicting an end point to their debt. Thus clearly the DMP is providing a way out - and light at the end of what may have been a long tunnel. However a DMP may also be in the interests of the creditor too. They may lose out ion some or all future interest charges, but at least the debt is being repaid. In an insolvency situation this is unlikely to be the case.
However, as mentioned, creditors do not have to freeze interest charges. Some will not do so, and others may reduce the interest rate rather than freezing it at 0%. In such cases a DMP runs the risk of actually increasing the debt. As ever in situations where a debtor is struggling with debts, professional advice is needed. It's important that those in this position are aware of all options open to them - and the pros and cons of each.