A reader asked what a realistic monthly payment would be in a Debt Management Plan (DMP) covering £10,000 of debts. I think she was hoping for a simple answer, but there are three different aspects to consider and to be truly realistic a DMP has to tick all three boxes.
If you would like an intro to debt management, read What is a DMP? then for more details, see my guide: DMPs – answering your questions.
1) How much can you afford?
A realistic DMP payment has to be genuinely affordable – if it’s too large for you it simply won’t be sustainable.
Think about what a livable medium-long term budget is for your family so you can feel sure you can make these payments every month. It will take several years to pay off all your debts, so you need to allow for things that don’t crop up every year, such as dentist’s charges and new tyres for the car.
Don’t forget that when you in a DMP you won’t be able to borrow more money if something unexpected happens.
It’s not easy to get the balance right here. Most people can make some savings, perhaps reducing their grocery expenditure by more advance meal planning, and this approach is a good way to sort out your debts as fast as possible. But if you are plan to spend nothing on clothes and entertainment, your DMP may only last a few months before it collapses, see How Far Should You Cut Back?
One way to make a DMP easier to manage is to save a small amount each month for an emergency fund. This may seem like it’s going to make your DMP longer as you will be paying less to it, but it can make the journey a lot smoother, helping to stop a nasty surprise becoming a crisis.
2) Will your creditors freeze interest?
If your DMP payment is too low, your creditors may not agree to freeze interest and charges. If it’s just one lender that may not matter too much, but if it’s several, then adding interest can sometimes make a DMP unworkable.
Here “too low” isn’t a simple percentage of the debt, it depends on what the creditor thinks you can reasonably afford. If you have just lost your job and are living on benefits, this may only be a token £1 a month, but your creditors will still usually freeze interest – see Making token payments for details!
People often worry needlessly about this problem – most creditors do stop adding interest and charges if they are shown a “sensible” income and expenditure statement. If you are using a firm to set up your DMP, they also check that none of your expenditures will look too high to a creditor.
3) How long will the DMP last?
Many people overlook this one! A realistic DMP is one that will clear your debts in a reasonable length of time.
Of course this doesn’t matter if you know the DMP will only be temporary, until you find a new job say, or your childcare costs fall. Here a DMP is a good debt option not because it will pay off your debts, but because it gives you some time to sort your finances out.
But if you aren’t expecting a big improvement soon (that lottery ticket doesn’t count…) do a simple sum. If you are paying £90 a month, your £10,000 debt will take more than 9 years to finish even if all your creditors freeze interest.
That’s a long while, I would say definitely too long. During that time you may need to replace your car and the washing machine, your kids will turn into expensive teenagers, you may retire and see your income fall etc. If you have to reduce your DMP payment, it may become never-ending.
If you are using a fee-charging DMP company, you could speed up your repayments by switching to StepChange or Payplan. They don’t charge you any fees so all your monthly payment goes to your creditors. How much difference would this make for you?
Alternatives to an unrealistic DMP
If your DMP isn’t going to pass all three of these tests, there may not be a “realistic” DMP payment at all. Too large and you can’t afford it, too low and the DMP will take too long.
There may not be any nice alternatives, but it’s worthwhile looking at all your possible options rather than waste years in a DMP and not making much progress paying off your debts:
- if you meet the criteria for a Debt Relief Order (DRO) that will often be a much better option than a DMP;
- if you rent or have little or no equity in your house, look at bankruptcy?
- if you have a house with equity and a secure income, check out DMP or an IVA?
- the ultimate tough decision – sell the house.
If you are unsure whether a DMP is a realistic debt solution for you, it could help to talk your options through with someone impartial, that won’t make money whatever you choose such as Citizens Advice if you prefer face-to-face advice, or National Debtline for phone advice.
Escaping from the payday loan trap
The reasons people worry about starting a DMP
Must you sell your car in a DMP?
Markos says
Hi please someone help me!
I am trying to get a DMP set up for my brother who has admitted to me recently that he is in debts of £20,000. Most of his debt is with payday loan companies which he turned too because of his gambling addiction. We are getting him help for this addiction and speaking to StepChange to try and get a DMP in place with his creditors.
I was wondering though while the DMP is in place (if successful) is he able to complain to these companies that he shouldn’t have been given a pay day loan? Hes in a good job and earns roughly 1200 per month but each month minimum payments from his various creditors were wiping out his salary and as well as this his credit score is extremely low with experian describing him as a ‘high risk’. What should my next step be in helping him to clear his debts?
Sara (Debt Camel) says
Getting a DMP in place is a very good first step. It does have to be your brother that wants this though – you can’t do it all for him, he is the one that has to understand why it is needed.
Once that is done, you could help him to make payday loan affordability complaints, see https://debtcamel.co.uk/payday-loan-refunds/. Any money he gets back can be used to repay other debts.
Rochi says
Hi Sara, I wanted some advice on my overdraft debt with lloyds bank, I don’t know how it ended up at £2530 but they allowed me to increase it in £20 intervals every week or whenever I wanted. Even after I told them I stopped working. I have just switched banks due to the wonga data breach and the new bank would not let me take the overdraft to new account which is completely understandable but I really would like to pay it back but the monthly charges are literally getting unaffordable and now I have no money going into that account and want to pay it off but have no chance with monthly interest at £46 a month, do you have any advice on what I can do and if you think lloyds will freeze interest and let me pay it off in monthly payments. Any advice is really appreciated x
Sara (Debt Camel) says
How much do you think you could pay towards it? Apart from the payday loans you have started complaints about, how large are your other debts?
Rochi says
Hi Sara this overdraft is my only large debt, all my other payday loans are repaid and I only have 2 credit cards which are mangable with very low credit limits. I can probably afford £50 a month.
Sara (Debt Camel) says
OK, then I suggest you talk to LLoyds and say you feel they have raised your overdraft to an unaffordable level and you would like them to offer a repayment plan for you to clear it as you have now stopped using the account.
Rochi says
Great thanks Sara I will do this tomorrow morning and hopefully they agree to this. Thanks so much for your help you are amazing ?
Roch says
Just a quick update, I have spoken to Lloyds and they really helped me. The lady I spoke to did an income and expenditure over the phone and assessed that I cannot afford the charges and interest and she can see that I am struggling as my income is very low she refunded all the interest and charges for last two months and advised me that I can contact stepchange and citizens advice and to switch banks and cancel all direct debits (which I have already done)
I agreed to refer the debt over to collections as this is the only way to freeze interest and charges for the future. I am now waiting for the collections team to call me to set up the payment plan to pay back in instalments, I feel like a weight has been lifted
Thanks so much for your advice Sara x
Scott says
Hi Sara, I currently have around £5000 of debt mostly in payday lenders. Was considering a debt management plan as an option as payments are getting too much each month. Around £2000 is from a bank and the rest payday lending. Any advice would be appreciated
Sara (Debt Camel) says
I think a debt management plan is often a very good way to get out of the payday loan trap. Read https://debtcamel.co.uk/help-payday-loan/ which looks at this exact subject.
Then, when your DMP is underway and you have cancelled the CPAs to the lenders with your back, you can think about whether you should make affordability complaints to the payday lenders, see https://debtcamel.co.uk/payday-loan-refunds/. If you can get any refunds that could help pay off some of your DMP debts. But these complaints can take many, many months, so you need to get yourself safe before starting them.
Emma Wilson says
Hi Sarah,
I have about £12k of debt and I’m looking at opening a DMP. My credit score is pretty shot but I earn enough money to be able to put about £500 towards the DMP payment each month. If I do this and creditors agree to stop interest then I could be debt free in just under two years.
My concern is if the creditors decide to default the accounts? Is it worth taking that risk to clear the debt been as my credit score is so poor anyway?
I’m only young and my debts came about after my father passed away, options very limited but I live with my mother hence I can put a considerable amount towards the DMP.
Thanks in advance!
Sara (Debt Camel) says
What are the normally minimum monthly payments to these debts? Are you still trying to pay these at the moment but sometimes missing some or paying late, or have you stopped paying most of them?
Emma says
Hi Sara, I have missed payments in the past but am normally quite good and currently up to date. My problem is that I had to start supplementing with payday loans to cover the shortfall when I was having problems with my income and now I can’t pay them back. I pay the minimum on credit cards and it only just covers the interest. I can not afford the payday loan payments and I have two personal loans that are £100 and £200 a month respectively. Plus I am over the limit on nearly all of the credit cards and racking up charges on an overdraft also.
Sara (Debt Camel) says
The problem with a DMP where you are paying so much each month is that the payments to some of your creditors are likely to be as high as the minimum payments – in this situation a lender will normally refuse to freeze interest.
How many payday loans do you currently have and who from? Have you previously borrowed and repaid loans from those lenders?
The £100 and £200 a month loans – how much is currently outstanding? Who are the lenders?
Emma says
So the payday loans are with new companies and there are four outstanding. I am in the process of sending in complaints due to the state of my credit record when I applied for them. There were also multiple missed payments and payday lenders already on my credit report at the time.
In terms of the personal loans, I have £1700 left on one and £3700 left on another.
My problem is that I will never pay these off whilst they are gaining interest.
Would I be better to adjust my budget so I’m paying less towards the DMP? It will take longer but are they more likely to freeze the interest? Any extra I could then save and put away for final settlements?
Sara (Debt Camel) says
The payday loans, complaint is a good idea, you want to ask them to remove the interest so you only repay what you borrowed, and ask for an affordable payment arrangement. Cncel the ZcPAs to them with your bank. If it takes a couple of months or more if it has to go to the Ombudsman to get your complaints settled, this is time you can be using to get your credit card balances under their limits.
The loans, who are they from? Are they high interest?
You should offer an accurate amount to a DMP. Offering less than you can afford traps you in debt for longer and risks CCJs if a lender thinks you are messing around.
Emma says
Hi Sarah,
The loans are with everyday who terrify me. I have not missed a payment with them yet but I cancelled a direct debit yesterday due to moving banks and they have been calling me at work today….and the other is a credit union loan. Am I better off going to the creditors directly to request reduced payments then? If they refuse then the payday loans alone need £600 from me this month and £600 is exactly the amount I do not have.
I’m really struggling to see a way out whilst everything is growing interest 😫
I also owe my cousin £8000 and she is in no rush to have this back but it will need to be paid back eventually and it’s another thing hanging over my head. If i add this to the StepChange debt calculator it estimates £300 to go towards creditors on a DMP with an ideal £200 going to the owing with my cousin..
Sara (Debt Camel) says
Cancel the CPAs to the payday loans immediately as you can’t afford them and send in the complaints asap As you only had one loan from each of the lenders, you can make the complaint detailed: “when I applied for this loan on dd/mm/yy you would have seen the following debts on my credit record: a,b,c,d,e etc this should have showed that I would not be able to afford to repay you.
Payday loans are the one lender who is very restricted in how much interest they can add as it’s illegal for them to add more interest and charges than what you borrowed. These debts cannot escalate out of control if you stop paying them.
Everyday loans, read https://debtcamel.co.uk/refunds-large-high-cost-loans/ and put in an affordability complaint to them too.
8k owed to a relative? Sorry but can I ask how you have managed to get about 20k of debt when you are living at home and presumably not paying much rent? StepcChange are very unlikely to be happy with you paying £200 a month to a relative.
Emma says
I pay my Mum £400 a month in rent and I put up £3500 alone for my Dads funeral alongside trying to help her pay the other debts they incurred and then getting myself into the same sinking ship.
I don’t need to pay the family loan back at all right now and may not need to for years as they are not in need of that money however I was using it as an example of how it affected the DMP estimated payment.
Sara (Debt Camel) says
I am sorry to hear of your Dad’s death and the problems it left for your mum. Are her debts and benefits now sorted?
This loan from family is interest-free – I suggest you forget it until you are really back on your feet. If you really have £500 a month spare, then I think you can probably work your way out of this if you get payment arrangements for the payday loans and the other two loans. Affordability complaints may be able to reduce what you owe by removing interest.