Debt Management Plan (DMP) Car Finance

If you're trying to work on your finances, and require help in getting organised when it comes to paying off debt, then perhaps a Debt Management Plan (DMP) could be for you.

For those looking to get car finance whilst already in a DMP, chances of acceptance become strained, but you are free to apply and a flexible lender could still help.

What is a Debt Management Plan?

A Debt Management Plan (DMP) is a repayment plan designed to help individuals or families struggling with unsecured debt, such as credit card debts and personal loans.

Your DMP will help you pay back the money you owe based on what you can afford.

How does a Debt Management Plan work?

1. If you need a DMP, you should consult a service like StepChange to make sure that it's right for you.

2. You should then set up a plan with a debt management company authorised by the Financial Conduct Authority (FCA). StepChange can also help facilitate this.

3. Once you have arranged the terms of your agreement, you can start making payments through your DMP.

A DMP is a casual arrangement to manage debt, giving creditors the option to take more serious legal action. 

A Debt Management Plan (DMP) is different to an Individual Voluntary Arrangement (IVA), as an IVA is a legally binding agreement, where creditors can't alter the terms once it's approved.

How long does a Debt Management Plan last?

How long your Debt Management Plan lasts will depend on how much money you owe and how much you can afford to pay off each month.

A DMP can last between five and 10 years, but there is no strict payment term like you would have for an IVA.

Does a Debt Management Plan affect your credit score?

A Debt Management Plan can have a significant impact on your credit score, as the plan is noted down on your credit file, signalling to lenders that you're working to manage your debt.

When you're on a DMP, it can be harder to secure new lines of credit due to your plan showing you've had financial difficulties, causing lenders to see you as a higher risk.

However, if you stick to your DMP and make on-time payments, your credit score will gradually improve over time.

Just be mindful that a Debt Management Plan will stay on your credit file for six years from the day it was set up before being removed, even if the debt hasn't been fully repaid.

Pros and Cons of a Debt Management Plan

Pros

Structured Repayments: A DMP provides a clear, structured plan for repaying your debts. It typically involves a single monthly payment to a company, which then distributes the funds to your creditors.

Lower Interest Rates: In many cases, a debt management company can negotiate with your creditors to lower your interest rates, which can result in lower overall payments.

Reduced Monthly Payments: Through lower interest rates and potentially extended repayment terms, a DMP can lead to lower monthly payments, making it easier to manage your finances.

Cons

Lengthy Repayment Period: A DMP may extend the time it takes to pay off your debts. While monthly payments may be more manageable, it could take several years to become debt-free.

Not All Debts Included: Secured debts aren't typically part of a DMP, and it mainly covers unsecured debts.

Potential Impact on Credit Score: While you're on a DMP, it will appear on your credit file. While this doesn't have the same negative impact as defaults or bankruptcy, it will still affect your credit score.

Can I keep my car on a Debt Management Plan?

You can typically keep your car while on a Debt Management Plan, as a DMP usually doesn't directly address secured debts like car finance or mortgages.

However, it's crucial to keep up with your car payments separately from your DMP, as falling behind could lead to repossession - even if you're actively managing your unsecured debts through a DMP.

If you're struggling to make your car payments, it's a good idea to contact your lender and discuss your situation. They may be willing to work out a new payment plan or offer some form of temporary relief.

Can I get car finance on a Debt Management Plan?

Though nothing is there to stop you from applying for car finance whilst on a Debt Management Plan, getting accepted for credit during a DMP can be challenging.

It's important to check your affordability before applying for new lines of credit, especially when you consider the overall costs of running a vehicle.

If you feel that you are in a position to apply for car finance during your DMP, then we can offer you an online facility which will allow you to check your eligibility for credit.

Our online form performs what is called a 'soft search', and will not affect your credit score, regardless of the decision.