If you’re managing multiple debts, a debt management plan (DMP) may be something you have explored to regain control of your finances. But what happens if you need extra money while you’re in a DMP? In this blog, we’ll explore what a DMP means for borrowing and how it can affect your ability to take out a secured loan.
What is a debt management plan?
A debt management plan can be used to help you simplify your debt repayments. Instead of juggling multiple payments to different companies, you make a single monthly payment to a DMP provider. This provider then distributes the funds to the creditors included in your DMP.
This approach can be useful if you’re having trouble keeping up with your debt repayments, as they can lower your monthly payments while still helping you pay off what you owe.
DMPs are informal arrangements you set up, meaning you may be able to adjust or cancel it at any point in time. In other words, it's not a legally binding agreement.
Which debts can I include in my DMP?
Not all debts can be included in a debt management plan. Typically, it is only non-priority debts that can be included. Some of these are:
• Credit card balances
• Personal loans
• Water or utility charges
• Bank loans
Any priority debts, which are mortgages, council tax, and court fines, usually cannot be included.
How can a debt management plan affect your credit score?
Being in a debt management plan can impact your credit score, but it is not usually in the way you might think. The DMP itself usually doesn’t appear on your credit report. However, each account included in the plan may show that your payments are being made through a DMP, which lenders can see and will consider.
The history of your debts will also show on your report and can affect your score. So, if you’ve missed payments or have defaults on your file, these will show on your record and can lower your score. Additionally, if you miss any payments in the future, these will also affect your score.
Typically, any negative marks can stay on your credit report for up to six years, so it can affect your ability to borrow money for a while.
While a DMP can make managing your debts easier, it’s important to know that it won’t automatically improve your credit score. However, sticking to the plan and paying your creditors on time can help you gradually rebuild your credit score.
Can I get a secured loan while in a debt management plan?
Yes, it is possible to borrow whilst in a debt management plan. Getting a secured loan can be easier compared to other borrowing options, because you are putting security behind the loan. This reduces the risk for the lender, making them more likely to approve your application even if you are in a DMP. However, the interest rates may be higher and there may be fewer options available.
Not all lenders are willing to approve a secured loan for someone in a DMP. So, it’s important to do your research and compare lenders carefully to find the right provider.
Factors that can influence approval include:
• Your current credit score
• The value of the property you’re using as security (collateral)
• Your payment history under the DMP
How does a DMP affect your loan application?
Being in a DMP signals to lenders that you’ve had difficulty managing your debt in the past. While it doesn’t automatically prevent you from borrowing, you may face:
• Higher interest rates
• Lower borrowing limits
• Stricter eligibility criteria
Lenders will want reassurance that taking on a new loan won’t affect your ability to continue repaying your DMP and other existing debts.
Can I get a secured loan after completing a DMP?
Waiting until your DMP is fully settled may improve your chances of approval. Once your debts are cleared, your credit file may still reflect past issues, but lenders will see that you’ve successfully managed your repayments. This can increase trust and potentially allow you to access better rates and higher loan amounts in the future.
Summary
Being in a debt management plan can make handling your debts more manageable. However, it can also affect your ability to borrow. Getting a secured loan while in a DMP is possible, but it may come with higher interest rates and stricter requirements. Waiting until your plan is fully completed may improve your chances of approval and could allow you to access better loan terms.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
