What is a Debt management plan (DMP)?
A debt management plan helps you to manage or organize your debt and design a strategy in paying them off with a single but affordable monthly payment. It is a casual arrangement with your unsecured creditors to reimburse obligations over a broadened time frame. If you are considering choosing a debt management plan (DMP) you need to understand what is involved before you emerge into it.
Pros of a Debt Management Plan (DMP)
A single and affordable repayment plan based on your earnings and expenditure in which you can choose to pay either monthly, weekly or fortnightly
Debt management plan is flexible, the payment sometimes changes according to the change in your circumstance.
Debt management plan will help manage all correspondence from your creditors and request that they quit sending them to you.
Potentially freezing interest and charges- Debt management plan helps negotiate debt with a creditor and also do everything within the capacity to stop all interest on debts or stop all future charges on debt in other not to worsen the present situation.
Consolidate all debt with one affordable monthly repayment strategy.
Debt management strategies
There are certain and various ways to manage debt but it depends on the type of debt; maybe the Efficient debt or Inefficient debt.
Efficient debt: They are also known as Tax deductible. These are debt taken to purchase income producing assets such as shares or investment property. This type of debt qualifies for a tax deduction in relation to interest cost.
Inefficient debt also known as nontax deductible are debts or loans taken to purchase services or assets which does not generate income examples include purchasing a resident, cars, vacation expenses. In the case of these type of loans, the debts are considered to be inefficient from a wealth creation perspective and its often times serves as a drainage on your long-term wealth accumulation capacity if not manage properly. Outlined below are the strategies you can use to reduced these types of debt.
Increasing your regular repayments: increasing the size of your regular loan repayments is transferring enough cash into your loan. If you are paying $250 monthly before try and increase it to $350.
Increasing the repayment frequency: never forget that as interest on your loan is calculated daily on your outstanding loan balance, the longer the frequency or period of your payment the higher your loan balance and also the greater the interest charged. So more frequent loan repayment will result in less interest charged and a lower reduction in debt.
Consolidate your debt: This is a simple and easy strategy to lower all your overall interest rate and easily manage your debt by consolidating all debts into a lower interest rate in other to help repay your inefficient debt quickly. This strategy will help you save interest when your repayment and loan term are at equal level.
Debt recycling: it is an effective strategy to accumulate wealth over the long term of paying back loans or debt. It process involves using the surplus capital to reduce inefficient debt and then replacing it with efficient debt in the form of an investment loan. There are two ways in which debt recycling can be undertaken and the ways involve
- Regular Debt recycling: if you have regular or surplus means of income, this can be used to increase the regular repayment of your inefficient debt such as home mortgage or personal loans.
- lump sum debt recycling: is a method that involves having an available capital or saved money such as bank account savings, which can be used to clear out any inefficient debt.
In summary, the aforementioned ways are strategies in which you can use to get a solution to your indebtedness using the debt management plan