When on a debt management plan, its important to know what happens with interest charges. Cashfloat explores interest charges and debt management plans.
- Usually creditors will agree to stop or reduce interest and charges when you begin a DMP
- Financial Ombudsman may be able to help you negotiate with your creditors if you and your DMP provider were unsuccessful
Western Circle, trading as Cashfloat, is a payday loan lender from London. Our short term loans help our customers overcome short term money problems. As well as helping our customers with our loans, we also aim to help people to overcome financial difficulty with our easy-to-use guides and hands-on articles.
This article will help you understand what happens to interest charges and fees for your debts while you are on a debt management plan.
Seek Help and Advice
Before you embark on a debt management plan you should be sure that it is the right solution to your debt problems. There are many debt solutions available to people in the UK and you must make the right choice. For people who are struggling with debt there are many free charitable organisations, such as Stepchange and Christians Against Poverty, which offer professional and impartial debt advice. On top of offering advice about how to choose a debt solution, they can often lead people the whole way through their recovery from debt.
Most Creditors Will Stop or Reduce Interest and Fees
When you enter into a debt management plan (DMP), you should expect your debt management plan provider to try to negotiate a suspension or reduction of interest charges and fees for your debts. And, in most cases, a person’s creditors will, indeed, agree to stop or reduce interest charges while you are on your debt management plan.
Usually, for a debt management plan to work, fees and interest charges must be stopped or reduced. Otherwise, debt will continue to increase, making it more difficult for the debtor to repay the money. In some cases, it may make it impossible for them to do so. When you budget yourself for your DMP, you will prove to your creditors that you are facing financial difficulty and can only afford to make the payments that you offer. If creditors push you too hard, financially, they may make it impossible for you to pay back what you owe. If this is the case, you will be less likely to start a DMP and, as a result, they may get even less money from you. On top of this, industry guidance encourages creditors to stop or reduce interest for people struggling financially and most companies that provide credit follow this guidance.
Are Creditors Required to Stop Interest and Charges?
Debt management plans and individual voluntary arrangements (IVAs) are often compared. When you are on an IVA, your creditors are legally obliged to stop charging interest and fees on your debts. In comparison, under a debt management plan, there is no legal obligation for your creditors to do so. While this is the case, most people will have interest and fees stopped or reduced while they are on a DMP.
Creditors are most likely to continue adding interest and fees where they reject your DMP offer altogether. However, in theory they can continue to add interest and fees at any time. Some people will find that despite their best attempts, and even after they have made a reasonable offer in a DMP, some of their creditors refuse to cancel interest and charges. When this happens, it is often possible to renegotiate with your creditors, complain or, when there is no resolution, work around the problem.
Often your DMP provider will be able to advise you on the best course of action to take and there are some steps you can take by yourself, which we will explain later in this article. One thing to note is that interest and fees on debts, sometimes, won’t stop immediately and there may be a lag while your DMP begins.
Interest and Fees May not be Stopped Immediately
When you begin a debt management plan, you may find that some of your creditors stop or reduce interest immediately while others wait longer. Some will wait to confirm that you are making payments successfully before they stop charges and others may have other reasons for continuing to add charges for some time.
Normally, interest and fees are stopped or reduced within a few months and it is rare for a creditor to continue to charge for the duration of a DMP. If you find that interest and fees are still being added unexpectedly, you should speak to your DMP provider. They may be able to find out why this is the case and to resolve the problem.
Debt Management Companies That Promise to Stop All Interest and Fees
No debt management company can guarantee that a creditor will freeze the interest and fees on a debt and you should be wary of companies who make this promise. It is always better to go with a free debt management charity, than with a fee charging debt management company anyway.
Why Should Your Creditors Stop or Reduce Interest and Fees?
Here’s an explanation of the main reasons why your creditors should stop or reduce interest and fees for your debts while you are on a debt management plan.
As we already mentioned, one of the primary reasons that lenders will stop, or at least reduce, interest and fees for debtors while they are on a debt management plan is that many of them abide by guidance given by the Standards of Lending Practice. This is otherwise known as the lender’s code. Under this guidance, many lenders will try to act sympathetically and positively towards customers who are struggling to repay debt.
One key piece of guidance given by it is that, if a borrower produces documentary evidence to show that they are in financial difficulty, the company should consider either making a reduction to interest and fees or stopping them altogether. For a company to make this consideration, a statement of affairs must be constructed. This shows the income and outgoings of the borrower taking into account all their priority payments and living expenses. This statement of affairs will prove to the creditor that the borrower is in financial difficulty. This information will put an onus on the creditor to act sympathetically and to work towards a solution.
If a company decides not to freeze interest or stop adding further charges to the account, it should send an explanation to the customer with its reasons. Many creditors will be sympathetic towards their customers and will also not want to be seen as irresponsible lenders by not adhering to the lender’s code without good reason.
Some people will find that their original creditors sell their debts onto a debt collection agency. These companies also have a code of practice, which states that they should also ‘consider reducing or stopping interest, charges or fees being applied to an account if the customer has demonstrated financial difficulties’. So, regarding stopping or reducing interest and fees, the guidance is the same for your original creditors as it is for a debt collection agency.
The first stage of starting a debt management plan is budgeting yourself and working out exactly how much you can afford to pay towards your debts. This is normally done with the help of your debt management plan provider. Ultimately, you should produce an income and expenditure financial statement. This should be comprehensive and should prove exactly what your financial commitments are and how much you can afford to pay towards your debts. From this you should offer monthly payment amounts to your creditors, which should not apply bias towards any lenders and should offer an honest and reasonable commitment to paying off your debts.
One crucial thing about your budget, from your creditors point of view, is that it demonstrates that you are in financial difficulty and that the money you are offering is all you can really afford to pay. If this is the case, they will be likely to be considerate of your position. Accordingly, they will follow the lender’s code, treat you with sympathy and work towards a solution. A lender will be able to see that you are trying your best to correct your financial situation and most companies will be sympathetic to your efforts, especially if, in the past you were a good customer who had no problems with repayments.
Another point arising from the fact that you are in financial difficulty is that it may make commercial sense for creditors to stop or reduce interest as this will make it more likely for you to repay your debt.
In some cases it will make commercial sense for lenders to stop or reduce interest as this will make it more likely that you will work towards repaying your debts. Continuing to add interest and fees may cause your debt to increase to the point where it becomes difficult for you to make repayments. If it is difficult for you to repay your debts, you will be less likely to stick to your DMP and seek an alternative solution to your debts. This could result in your creditors receiving less money than if you repaid them under a debt management plan.
Problems with mental health can often result from money worries. Most lenders will have a policy in place to deal with vulnerable people who are suffering from anxiety or depression as a result of debt. The Equality Act 2010 also requires creditors to make reasonable adjustments to help you if you are experiencing mental health problems. Reducing or waiving interest and fees on a debt may be seen as a way to reduce stress for someone who is suffering a mental health issue as a result of debt.
What to do if Creditors Won’t Stop or Reduce Interest and Fees
Although there are usually good reasons to do so, some people will find that their creditors refuse to change interest rates and fees. Other people will find that, while they have a debt management plan in place and make payments to creditors who have waived fees and interest, they will have other creditors who have refused to do the same. Here’s what to do if this is the case.
Speak to Your Debt Management Plan Provider
If you find that any of your creditors have not reduced or stopped interest and fees, the first thing you should do is speak to your debt management plan provider. If this has occurred by error, your DMP provider will be able to speak to your creditors and correct the error. Where it is the case that your creditors have refused to stop or reduce interest and fees, then DMP providers, such as Stepchange or Payplan, are experienced in negotiating with creditors and should be your first port of call.
They will often be able to take your case to your creditors and petition further for fees and interest to be stopped or reduced. If it is the case that you are in financial difficulty, then normally they will eventually be able to negotiate a stop or reduction to interest charges and fees. Where they cannot do so, they will be able to advise you on the best course of action to take. If a creditor refuses to stop or reduce interest and fees this doesn’t usually mean that a debt management plan will fail.
As we have already explained, a creditor should act with sympathy towards a debtor who is experiencing financial difficulty. If you can prove that you are in financial difficulty and your creditor still refuses to reduce your interest and fees, you can make a complaint.
How To Complain
When all else has failed you can put in a formal complaint to a lender that refuses to stop or reduce interest and fees on your debt. The first place to complain is your creditor’s complaints department. Usually there will be a time frame within which they will have to provide you with a response. Making a complaint directly to the company may be enough to spur them into action and to encourage them to take a more considerate view of your position.
If, after doing this, you are still getting nowhere with your requests for a reduction to interest and charges, then you can go to the Financial Ombudsman and ask for a ruling. Again, there is no guarantee of success with this approach. However, the Financial Ombudsman will be able to look into whether your creditors have acted responsibly regarding the financial difficulties you are facing. In the past, the Financial Ombudsman has ruled, in certain cases, that interest and charges should be refunded to people who unsuccessfully tried to have them stopped while they were repaying debts in a debt management plan.
In Summary…
Having interest and fees stopped while a debt management plan is in place is a must for many people preparing to start one. If interest and fees are applied to a debt, it can often make it difficult or impossible for a person to repay their debts. Luckily, for most people, lenders are sympathetic towards people experiencing financial difficulties and will agree to do so.
If you are unlucky and any of your creditors refuse to stop or even reduce interest and fees, then remember to follow the advice we have set out here. If you are at all unsure about what to do, remember that there are many professional, free debt charities, such as National Debtline who will be able to advise you about what to do. Your debt management plan provider will be able to help you as well. It is a good idea to persevere in your attempts to have interest and fees stopped as, if this happens, it will take you less time to clear your debts.
Cashfloat is a short term loan provider which provides payday and small personal loans to customers in the UK. This guide is dedicated to debt management plans. Next up in the guide is an explanation of how being on a debt management plan will affect your credit rating.
Chapter 11:
Debt Management Plans and New Mortgages
Chapter 13:
How Does a Debt Management Plan Affect Your Credit Rating?
