A reader asks if she has to sell the car if she chooses a Debt Management Plan (DMP). The simple answer is “No”, but there are some points it is worth thinking about.
A DMP doesn’t have fixed rules
DMP is an informal arrangement with your creditors. It is explained in detail here, including how to set one up and what the pros and cons are, but a simple summary is that you offer your creditors what you can afford to pay each month and ask them to freeze interest. There are no rules about whether you can own a car or restrictions on how much it can be worth, so you certainly don’t have to sell your car.
It is a good idea to include details of your income/expenditure with your DMP letters (or your DMP provider will) but this doesn’t list assets that you own such as your car.
Your expenditures have to be realistic
They have to appear realistic to your creditors. If any of your costs appear unusually large, then your creditors may simply refuse to freeze interest., which means that your DMP is not going to help you to clear your debt. This won’t normally be a problem with a car that you own, but could be if you have a car with very expensive HP finance.
They also have to be realistic for you. Although DMP payments can be changed, you don’t want to have to reduce them whenever the road tax is due or new tyres are needed. So your budget has to include a monthly amount for all the car costs you will have in the next year: insurance, road tax, petrol, parking, MOT cost and money for possible repairs.
Could you reduce your car costs?
Every pound less you spend on the car is a pound you can use for something else or pay off your debts. If motoring is a big proportion of your expenditure then it’s worth trying to trim it down as much as possible. Although you may think the main point of a DMP is to stop the interest, it is worth taking the most advantage of this by generally improving your finances so you can clear the debts even faster. So:
- shop around for cheaper car insurance;
- always find the cheapest petrol in your area;
- think about sharing a car if you use it to get to work;
- take it in turns with other parents to take/pick up all the kids from school;
- check your tyre pressures regularly – under-inflated tyres increase petrol consumption and wear out faster;
- empty the boot of stuff that isn’t often used and remove a roof rack.
Could you save even more by changing your car for a smaller one, in a lower insurance group with better petrol consumption? Go for a reliable make in an older car.
Could you manage without a car?
If you are in a rural area, the answer may well be that you can’t. But have a think what you would do if you lost your license. Car clubs can be good options if you can get to work on public transport, or if your household usually manages with one car, only needing a second occasionally.