What are Debt Management Companies and what are the Pros and Cons one?
The Debt Management Company (DMC) has been around for many years now and many thousands of people in debt have turned to them for help. In this article I am going to explain in a little more depth what DMC’s do and the different kinds of DMC’s that are available to choose from. After this I hope you will be able to draw your own conclusions into whether a DMC is right for you.
To begin, for those readers who are not familiar with the term DMC, let’s look at what they are. To begin with, in order to use a DMC you must have one or more debts. This could be Mail Order, Bank Loans, Payday Loans, Credit Cards and even Mobile Phone Contracts. In addition to this, the monthly payments on these debts will usually have become unaffordable to you (or at least if you are able to pay these debts, other things such as food, rent and utility bills would have to go unpaid). You may be in that horrible trap of considering borrowing more money to pay these debts, which is never a good idea as this only makes the debt bigger next month.
In such cases you may decide that you want, or need, some expert help in order to overcome the situation you have end up in. You may be too embarrassed to contact your individual lenders, or are not sure exactly what you can afford to pay them. If this is the case one possible solution is a DMC.
You will normally need to list all of your monthly income and living expenditure. Some DMC’s ask you to do this yourself, others will work through this with you, either face to face or on the telephone. You will also need to list all of the borrowing you currently have, along with the outstanding balances (although some DMC’s will get this directly from the lender).
The DMC will then work out what you have left over each month based on your budget planner. This may be several hundred pounds; it may be just a few pounds. They will then share this out among the creditors in the same proportion as the amount you owe. Having done that, they will write to each of the creditors with the monthly repayment offer, they will also ask that further interest and charges be frozen on the account to enable you to reduce the balance. On the assumption that all of the creditors accept the offer, the Debt Management Plan is put in place. Each month you pay the DMC the agreed amount and they distribute this to all of the creditors. They will also deal with all communications with the creditors, including making any adjustments to the plan if things change. After the required number of payments all of the debts are repaid and you are hopefully back on the straight and narrow.
Can’t be bad…can it???
In my opening paragraph I mentioned ‘different kinds of DMC’, and this is where you need to be very careful. There are only really 2 types, those that charge (aka ‘fee charging’) and those that don’t, (aka ‘free’).
Now the fee charging DMC’s have been reined in enormously over recent years with changes in regulation and the need to treat customer fairly. In days gone by it was not uncommon for them to keep the first 2 months’ payment as a setup fee, yes not a penny would go to the creditors until month 3, and then keep a percentage of each monthly payment as an admin fee. (sometimes as high as 30%). As I said, regulatory changes have meant that money does start to flow to the creditors from your very first payment, and often the setup fees and management fees are lower, but you are still paying a fee.
Let’s look at a simple example. You owe a total of £2000 in debts. You can afford repayments of £50 per month. Again for simplicity let’s assume the DMC does not charge any setup fee and charges 20% monthly admin fee.
So from your £50, £40 goes to your creditors and £10 goes to the DMC. That means at £40 per month it will take 50 months to clear the £2000 debt. Paying £50 per month for 50 months would means the total you have paid would be £2500. This means that you have paid £500 more than the original debt and taken 4 years and 2 months to do it.
OK, to be fair to the DMC, they have to make money to pay staff, cover overheads and make a profit, and after all, no one would dispute that you were paying for their services that you were using, but when you are already in financial hardship there are better uses for £500.
They say that there is no such thing as a free lunch, but in this case there just may be. The answer lies with a ‘free’ DMC. Probably the biggest and most well-known of these is StepChange. Known as a ‘debt charity’ it can provide exactly the same service as described above, but they do not charge you anything for doing it. They are a professional organisation, so there is no need to be worried that they will do a second class job, and its free.
So back to that example, now the whole of your £50 will go to your creditors and the total you will pay is the £2000 you owe. Better still, the debt will be cleared after 3 years and 4 months, that’s 10 months’ earlier and 10 months that you will have a spare £50 in your wallet as your plan has ended.
As a lender, we would actually rather you came to us if you were having difficulties and we could work through these together. We do not bite and or friendly team will always try and work with you, however we understand that not everyone is comfortable with this and would prefer to use a third party to help them, we totally respect that decision, but all we ask is that you consider carefully the kind of DMC you use.
Finally, the Money Advice Service (MAS) was set up by the government to provide free and impartial money advice. If you have any money worries at all they may be able to help you. Their website is https://www.moneyadviceservice.org.uk/en and they can be contacted by phone too on 0800 138 777.
Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk
This article contains information about products/services offered by us as well as those that we do not offer.
Author: Internal Collections Department