pros and cons of debt management programs
Pros and Cons of Debt Management Programs
For a person under debt, it is but natural that he/she opts for programs or plans that can bring relief from debt. But during these times of economic downturn, it is necessary for debt-ridden individuals to understand the advantages and disadvantages of debt management before choosing them.
The economic bubbles that caused the economic recessionary cycles of 2007 - 2010 have also severely affected the debt and credit industry. The reaction of the recession that came out against people and borrowing consumers left behind tattered credit reports, several brutal bankruptcies and freaked out foreclosures.
The overall effect was not nice, and brought about a negative atmosphere among lenders and borrowers. When the recessionary cycle commenced, the rate of unemployment and frequency of lay offs substantially shot up. The people who got fired had already borrowed several secured loans, unsecured loans and were using credit cards.
The effect was that these people were not able to repay bills and loan installments on time. Deep in debt such borrowers often though of debt management programs as an alternative to get rid of debts. The pros and cons should however be thoroughly considered before a person makes a choice.
What is Debt Management
It is principally a service that helps individuals to negotiate debt interest rates, late fees and service charges with their creditors and lenders. Many debt management agencies also help people in debt settlement, provide a consolidation loan and initiate credit repair. Thus, these programs affect credit score in a positive manner. The total services can be concluded as the 'services that help a person to plan out and quickly repay all debts'.
Pros and Cons of Debt Management Programs
Pros
- Erases all Debts: The total process that is involved in the debt management erases all the debts that are owned by the borrower. The debts include all loans, credit card debts and the ones that have been incurred from private lenders.
- Improves Credit Report: The credit report of the person also improves as a result of the debt management program. The service provider plans a repayment schedule that helps the borrower in making timely payments, and thereby increase the credit score.
- No negative effects of debts: Negative effects of debts such as excessive late payment fees, foreclosures and bankruptcy are written off and wiped out.
- Lowered Interest and Payments: The interest of the debt and the total amount that is owed is drastically reduced, and the debt payoff is easily possible.
- End to Collection Calls: The collection calls will no longer harass the borrower as the debts are being paid on time.
- Debt Management Fees: There are several debt management fees that are levied by the service providers. These fees in some cases tend to be expensive and burdensome. The payment of fees also does not ensure that the debt would be wiped off completely.
- No guarantee for debt settlement: There are a few cases where during the debt settlement and debt negotiations the lenders simply refuse to waive the fees or any extra charges.
- Report to Credit Reporting Agencies: In some cases, there is also a possibility that the lenders would together report your participation in the program. In the past, such a report to credit reporting agencies has stuck to the credit history. Such a report is also often commented to be a blemish on the credit report.
- Drop in Credit Ratings: During the phase of settlements and negotiations, the credit score often drops. However as you start repaying the debts in a planned manner, the ratings rise.
- Risk of Security being taken over: Another eminent risk that, in case of secured debt, the lender might take over the security as a debt recovery, if he feels that too many losses are being incurred.
- Not Foolproof: A huge drawback of debt management is that it is not exactly a fool-proof way of erasing your debt. Such programs also have a negative effect on the credit report in some cases.