Payday Loan during a Debt Management Plan
If you need emergency cash while you are in a Debt Management Plan (DMP) it is not uncommon to consider taking a Payday loan. Because the Plan is an informal agreement there is no legal reason why you should not borrow more while you are in it. However if you do so you could risk the failure of the whole agreement and making your debt problem much worse.
What is the problem with borrowing a Payday Loan if you are in a Debt Management Plan?
If you have a financial emergency such as an unexpected car repair bill during a Debt Management Plan you may not have the spare cash to cover this expense. Borrowing cash from a payday lender could therefore seem the ideal solution to your problem. However the issue you then face is how you will repay this new debt.
You will have no extra money to repay the payday loan because you are already be paying all of your spare income into your Plan. Unless you are able to make significant savings from your living expenses the only other thing that you can do to repay the loan is reduce your Plan payment or miss it all together.
If you start to miss payments without agreement from your creditors they will take the view that you have broken the terms of the Plan. In reaction they may start adding interest and charges to your account balances again. They may even restart collection actions against you. In short your whole Plan will be at risk of failure.
What is the alternative to borrowing a Payday Loan during a Debt Management Plan?
If you are in a Debt management plan it is of course best to live within your agreed living expenses budget. However if you have a financial emergency this may not be possible. So what is the alternative to getting a Payday loan? One option is to agree a payment break with your creditors.
A payment break allows you to stop paying your Plan for a period of time. Instead of paying your surplus income to your creditors you use it to cover the emergency expenses you have. The break could last for a number of months if necessary.
Getting agreement from your creditors for a payment break might seem unlikely. However if you explain the need to them in advance and as long it is genuine they will often agree to help. At the end of the day your creditors know that if they do not help you might be forced to borrow more money. This would ultimately put your whole Plan at risk which is in nobody’s interest.
DM4U Tip: If you are using a debt management service provider you should speak to them about your situation. They should be able to agree the necessary payment break with your creditors on your behalf.
How to plan for financial emergencies in a Debt Management Plan
The average Debt Management Plan will last for a number of years. It is unrealistic to think that you will not have one or even more financial emergencies during that time. For this reason you must try to make sure that you are putting money aside to cover emergencies and problems. If you do this it will minimise the need for payday loans or payment breaks.
You should have included an amount for emergencies in your Living Expenses Budget. At the very least you should be saving this each month. In addition you should have included something for car and home repairs (if you are a home owner) which you can also be putting aside. Saving like this while you are in a DMP is never easy but it is a vital part of managing your Plan correctly.
DM4U Tip: If you did not include these items in your living expenses budget you may be able to change it. However doing so will mean the amount you can pay into your Plan will fall. New lower payments would then have to be re-negotiated with your creditors. However if the request means that you will be better able to sustain your payments they should agree.
What if your financial circumstances change permanently during a Debt Management Plan?
If your financial situation has permanently become worse you may be tempted to try and fill the gap with a Payday loan. However this would be a mistake. Next month you will simply be in the same situation and then you will have the additional problem of the loan to repay as well.
The way to manage a permanent change to your finances is to review your whole income and expenditure budget. You then need to reduce the amount you pay into your Debt Management Plan if necessary. Such a reduction will have to be agreed with your creditors but if it is unavoidable they should help you.
DM4U Tip: If your change in circumstances is very severe the resulting payment reduction may means that you now cannot pay your debt in a sensible period of time. If this is the case you will need to consider using a different debt solution.
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