Debt management vs debt consolidation remortgage
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Debt management plans and debt consolidation remortgages are two of the most common ways for people to address their debts. Both enable the borrower to reduce their monthly outgoings, but there are important differences between the two that mean that each is more suitable for people in a different situation.
Debt management plan
A debt management plan is an informal arrangement with your lenders in which you will agree to make smaller monthly payments towards your debts, based on what you can realistically afford, over a longer period of time than originally agreed.
Because of the longer repayment period, it`s possible that you`ll pay more in interest overall, although in some cases your lenders may agree to freeze (or reduce) the interest on your debts. This will prevent your debt from growing (or growing as fast).
An informal arrangement, a debt management plan can be arranged on your own - but because this can be time-consuming and stressful, many people prefer to use the services of a professional debt management company, which can negotiate with their lenders on their behalf.
But be aware that your lenders are under no obligation to accept any changes proposed as part of your debt management plan, and since the plan is usually agreed in six- or twelve-month periods, there is no guarantee that they will agree to renew the terms at the end of a period, although they`re likely to do so if they can see it`s the best way of helping you repay your debt.
Plus, you should be aware that changing the way you`re repaying your debts will show up on your credit report, which can make it harder and/or more expensive to obtain further credit for the six years it shows on your credit report.
Best for: homeowners or tenants who are unable to keep up with debt repayments under the existing terms, but who could repay their debts in full if their lenders would allow them to repay their debts in a different way.
Debt consolidation remortgage
A debt consolidation remortgage works in a similar way to a debt consolidation loan, except that rather than taking out a new loan to cover your existing debts, you would withdraw some of the equity tied up in your home in order to pay off the debt. You`d do this by taking out a new, larger mortgage, which you`d then begin paying off like any other mortgage.
Your `equity` is the portion of your home`s value that you don`t owe anything on - i.e. any deposit you put down when you bought the property, plus anything you have paid back towards your mortgage, and any increase in the value of your home.
One difference between a debt consolidation remortgage and an unsecured debt consolidation loan is that the remortgage is secured against your home. That means that if you fail to keep up on payments, your home could be repossessed - and so you should be completely sure you can afford the larger mortgage payments before you go ahead.
On the plus side, because the remortgage is secured, the interest rate you are offered is likely to be lower than on an unsecured debt consolidation loan. Depending on how much equity you own, and on your ability to repay, you may also be able to borrow more than you would with an unsecured loan.
Finally, be aware that repaying any debt over a longer time period may increase the overall cost, as you`ll be paying interest for longer - even if the actual rate is lower.
Best for: homeowners with multiple debts who would like to reduce their monthly outgoings and/or simplify their finances.
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