Can I Get a Loan on a Debt Management Program (DMP)?

Debt management programs are used by many people to pay down and get rid of all kinds of unsecured debt, such as medical bills and credit card debt. If you’re thinking of getting a loan while you’re on this kind of program or if you’re wondering whether this kind of program would work for you, this article is going to cover all you need to know.

Key Takeaways

• DMPs help individuals tackle unsecured debts like medical bills and credit card debts.
• These structured programs, facilitated by credit counseling agencies, negotiate with creditors to reduce interest rates and establish affordable repayment plans.
• While DMPs can lower interest rates and simplify debt repayment, they require adhering to a strict budget and may impact your credit score initially.
• They typically last 3-5 years and involve making a single monthly payment to the credit counseling agency, which then pays your creditors.

What Is a Debt Management Program (DMP)? 

A debt management program (DMP), also known as a Debt Management Plan, is a structured program designed to help individuals or businesses repay their debts more effectively. It is typically offered by credit counseling agencies and involves negotiating with creditors to reduce interest rates, waive fees, and establish a repayment program that fits better into your budget.

In many cases, a DMP will reduce your overall interest rate to about 8%, making the monthly payments easier to manage.

Non-profit credit counseling agencies offer these plans. For each customer, they do a detailed analysis of the individual’s expenses and income, and then they create a household budget that will include a fixed monthly payment to the creditors. This payment will be affordable based on each person’s unique circumstances, allowing them to pay the debt down more effectively.

The money will be paid to the counseling organization, which will then use it to pay the debts down, using the schedule agreed upon between the counselor and the creditors. By tailoring the amount to what is affordable for the individual, debt management programs help make debt more manageable and allow people to pay it off.

Additional Details To Know About DMPs

It’s important to understand debt management programs before you take one on. It can take up to 60 months to pay off debt using a DMP, although some are shorter, and could be as little as 3 years. This will depend on your circumstances, including how large your debt is and how much you can afford to pay off at a time.

It’s also important to know that if you are late on your DMP payments, you might lose progress in decreasing your debt, and this could have a further negative impact on your credit rating.

The Pros and Cons of Debt Management Programs

There are many advantages to debt management programs, as well as some drawbacks. Let’s start with the pros and then move on to the cons.

The Pros of DMPs

These programs give individuals access to a professional who can help them manage their finances. Being on one of these plans will also stop creditors and debt collectors from calling because there will be a plan in place for the repayment. Debt management programs can reduce or eliminate late fees, which would otherwise make it even harder to manage debt.

Furthermore, a DMP can improve your credit score gradually, especially if you meet all your payments as agreed. It will take time, but it’s possible. In many cases, a DMP can get you out of debt in 5 years or even less. It organizes you and makes it easier to stay on top of your bills and outgoings.

The Cons of DMPs

A debt management program does have some drawbacks, of course, with one of them being that it’s hard to take on more debt, and you’ll have to close credit card accounts to get one. You won’t be allowed to take out more loans in most cases, and you’ll have to agree to the minimum monthly payment.

Not all creditors will agree to the plan, either, which may increase your costs and make it harder to stay on top of the plan.

Do Debt Management Programs Affect Your Credit?

In many cases, a DMP will harm your credit score initially. This is because you will generally be paying less to your creditors than originally agreed, and taking longer to pay the debt back. This may make it harder to get credit in the future.

However, if you adhere to the debt management program and make regular payments to reduce your debt, this could improve your credit score in the long term. Your DMP will often be visible in your credit reference file, and if it is, it may stay there for a while even after the DMP has ended.

Related: Improve your credit score with these 20 strategies

Responsibilities in a Typical Debt Management Program

There are a few simple responsibilities that you must fulfill when you participate in a DMP:

1. Make your monthly payment on time. This is the most important part of your relationship with the counseling service. They need your monthly payment to make your payments.
2. Stay on track. You need to check your progress using the statements every month to ensure you’re on track with everything as agreed.
3. Don't add new debt. As we'll cover in the section below, the credit counseling agency will be very specific about what is acceptable under the program regarding new loans or financial responsibilities. 

Can You Finance a Car on a Debt Management Program?

In many instances, financing a car while on a debt management program is feasible. If acquiring a car is necessary for work or similar obligations, borrowing funds for this purpose may be an option. However, it's imperative to have a detailed conversation with your credit counseling agency to understand the implications and heed their advice.

Can You Get a Student Loan on a Debt Management Program?

Obtaining a student loan while on a DMP might be possible. This type of debt is typically viewed as an investment in your future earning potential and could align with your debt management program's guidelines.

Nonetheless, it's essential to communicate your intentions with the agency and carefully consider their recommendations on future repayment and impacts to your credit score. They may advise waiting before taking on additional loans.

Can I Get an Installment Loan on a DMP?

In most cases, an installment loan may not be eligible when you are on a DMP. Remember, you came to the credit counseling agency to help pay off debt and get your finances under control, they are going to be very strict about any new payments. So, if you do require an installment loan, it will need thorough vetting by your DMP provider and they'll need to approve.

In short, the eligibility for an installment loan while on a DMP varies based on individual circumstances. While some credit counseling agencies may approve such loans, others may not. 

Alternatives to a DMP

If you’re on a DMP, it’s better to avoid taking on new debt if you can, and there are a few options you can turn to.

• Start an emergency fund. One is to avoid unnecessary spending, so you’ll have more cash available when you need to pay for something like a new appliance, a car repair, etc. 
• Borrow money from family and friends. A second option is to try other ways of raising money, such as asking a relative or close friend for help, instead of getting a proper loan. This can be an effective way to raise cash without affecting your credit score, although it’s important to make sure you can pay the money back.
• Do it yourself. Next, see if you can repair yourself (if it’s something like a broken appliance) or see whether you can get it repaired by an expert. This will often cost less than purchasing a new unit. If repairing isn’t an option, try to purchase second-hand.
• Get a second job. Finally, consider picking up some additional part-time work to cover the expense, rather than turning to more debt. Bringing some extra money in, even with casual work, can help you stay on track with your debt management program.

As you can see, a debt management program can be very beneficial when used in the right situations, although it isn’t right in every circumstance. If you’ve got debt that you need to pay off and you’re struggling, reach out to a nonprofit credit counseling agency for assistance.

Related Frequently Asked Questions (FAQs)

For our readers who want to read about getting a loan on a DMP, here are some additional questions that came up. 

If I Enroll in a Debt Management Program, Can I Continue To Use My Credit Cards?

No, in most cases, you’ll have to get rid of your credit cards if you want a DMP. In some situations, you’ll be allowed to keep one credit card that’s only intended for emergencies. Once you’ve finished your debt management program, you can get a new credit card.

How Does a Debt Management Program Compare with a Debt Consolidation Loan?

Debt management programs and debt consolidation loans are distinct strategies for addressing debt, each with its own characteristics.

Debt management programs are not loans; they do not provide you with money. Instead, they involve working with a credit counseling agency to create a structured plan for repaying your existing debts. The agency negotiates with your creditors to potentially lower interest rates, waive fees, and establish a repayment schedule. You make a single monthly payment to the agency, which then distributes the funds to your creditors.

On the other hand, a debt consolidation loan is a loan that provides you with a sum of money to pay off your existing debts. This type of loan typically has a fixed interest rate and requires monthly payments. Often, these loans are secured by collateral, such as a home or a car.

Both debt management programs and debt consolidation loans can be effective solutions for managing debt, but they work in very different ways. It's important to understand the differences between the two approaches and choose the one that best fits your financial situation and goals.

How Long Does a Debt Management Program Last?

This depends on your debt, the monthly payment amount, and your repayment circumstances. However, on average, DMPs will last 3 to 5 years.

What Effect Will a Debt Management Program Have on My Current Interest Rates?

Ideally, your debt management program will lower your interest rates to make the debt more manageable. However, not all debt will be affected by a DMP. Mortgages and auto loans are not generally eligible and their interest rates will stay the same. It’s important to be aware of this before you take out a debt management program.

When Is a Debt Management Program Not the Right Option?

Generally, if your debt is small, a DMP isn’t worth it. If your debt is very large and you can’t both meet your living expenses and make payments toward the debts, a DMP won’t work for you.

The best thing to do is talk to a credit counselor before you make any decisions about debt management programs and whether they are right for you.

What Is the Difference Between Enrolling in a DMP and Filing for Bankruptcy?

A DMP is an attempt to pay off debts by bringing everything into a single payment, reducing interest rates, and lowering the fees you face. A DMP therefore allows you to pay off your debts, which is better for your credit score overall.

Filing for bankruptcy is your legal declaration that you are unable to pay off your debts, even once you’ve liquidated all of your assets. This has a very big impact on your credit report and can see the score drop by up to 200 points. The bankruptcy will also remain on your credit score for 10 years, so it has long-term implications.

What Should I Do If My DMP Company Shuts Down?

If your DMP company shuts down, you should immediately get in touch with your bank and stop making payments. Contact the creditors and ask whether you can pay them directly, or whether they would like to work out another payment program.

Verify that all previous payments were sent to them, and check your credit score. You can also contact another credit counseling agency to intervene on your behalf.

Note: The content provided in this article is for informational purposes only. Contact your financial advisor regarding your specific financial situation.