Debt management is a carefully designed plan which is geared towards keeping one’s debt under control. It is a deliberate effort made to ensure that one’s debts are kept at bay and to try to find a means of eliminating such debts.
Debt management helps individuals, businesses and government to navigate through their financial obligations while servicing their debts. Debt management is also a means of reducing one’s debt profile and maintaining financial buoyancy and stability.
How Does Debt Management Work?
An individual can create a personal Debt management plan, or can work with a credit counselor. Government and businesses can also employ the services of debt managers to come up with strategies to manage their debts.
For an individual, having lots of debts not only affects one’s finances, but also affects mental health. In order to manage your debts, you can bargain with your creditors to spread the debts over a period of time to enable one to cope and operate effectively within the current financial situation. You can also negotiate towards a reduction in the interest rate as well.
Debt Management With A Credit Counselor
You can also use the services of a credit counselor to assist you to draw up a repayment plan. This credit counselor can help you negotiate with your creditors for better repayment terms.
They can help you plan your budget to accommodate both your debts and your recurring financial obligations. They usually charge a fee to do this.
Government Debt Management
According to the International monetary fund, public debt management is the procedure of instituting and executing a strategy for running the government debt in order to raise the required amount of financial support, achieve its risk and cost objectives and to meet any other sovereign debt management goals.
Public debt management is a process by which a government establishes, formulate and execute a strategy to manage the debts incurred by the government.
Public debt management is meant to raise the required funding for running the government, achieve its set goals while taking into careful consideration the risks and costs and to meet any other goals they might have set.
Debt management includes all actions of the government, including both the treasury and central banks, which affect the composition and retirement of the public debts.
The aim of public debt management is seek to ensure that the level and rate of growth of their public debt is sustainable and can be paid back while still meeting all other needs. Every public debt management strategy should ensure that public debts are drastically reduced.
Objectives Of Debt Management
The major objective of debt management is to make sure that the government and the payments obligations are met at the lowest possible cost. Public debt managers, policy advisors and the government workers in charge of financing should understand the objectives of debt management.
Debt managers should advise the authorities on the costs and risks associated with such huge debt profile.
Importance Of Debt Management To Countries
1) Analyzing and managing a country’s debt profile are crucial for maintaining economic stability.
2) They fashion out strategies for the economic development of the country.
3) To minimize the interest cost of such loans.
4) Dept management is employed as a weapon to supplement monetary and fiscal policy.
Importance Of Debt Management To Individuals And Businesses
1) It helps individuals and businesses to settle their debts.
2) It helps them to keep a clean record
3) It improves investor’s and creditor’s confidence.
Debt Management Plan
This is an agreement between a debtor and a creditor to manage an outstanding debt. It is a mutual terms and conditions set up by both parties to achieve their aims. While the debtor is interested in paying off their debts, the creditor recovers their money.
Debt management plan allows an individual, business or government to pay off their debts at a rate they can afford.
Benefits Of Debt Management Plan
1) Reduces the stress of monthly payments. Using a debt management plan, you will deposit the money to your credit counseling agency. They will now send the money to your creditors. You don’t have to worry about making multiple payments monthly. The agency will do it on your behalf.Â
2) You may get lower interest rates. The agency may convince your creditors to lower your interest rate in order to reduce the total amount you have to pay.Â
3) You get fewer collection calls. Some creditors will call you frequently and send you random text messages from to remind you of their money. You can simply direct them to your credit counseling agency. That way, they stop bothering you.Â
4) Eliminate fees. Your credit counseling agency will help you to eliminate any future fees that may accrue to your debt.Â
5) Freedom from debt. A debt management plan will typically get you out of debt and set you on the right track to financial success.Â
Debt Management Principles
1) Understand Your Debt: Before borrowing, understand the nature of the debt. Are you borrowing for investment? Is the loan supposed to be used for wealth creation or for spending. Bad debts are not a good thing.
2) Objectives setting (Budget): Setting objectives on settling your debts means planning a budget for action. A budget is a plan of expenditures as against income.
3) Setting deadlines: Set deadlines on each debt. The deadline will help you plan effectively.
4) Pay off loans with higher interest rates first: Always remember that some interest rates are higher than others. Ensure that you pay attention to the loans with higher interest rates. This will help you cut down the total amount you pay for the loan.
5) Make it a practice: Make it a duty to pay your debts. Always have it in mind that you must service your debts. Paying for your debts should not be done whenever you feel like. It should be part of your financial obligations always. Take it very seriously.
6) Confirmation of results: Always confirm that your payments are received by your creditors and ensure that such payments reflect on the loan. Ensure that the loan amount is coming down as you make each payment.
Methods Of Debt Management
1) Advising On Debt: There are a number of strategies to help clients reduce bad debt and use good debt to create wealth. Bad debt is a debt invested in things that doesn’t create wealth or create income.
These debts used in purchasing things that do not create wealth ends up hanging on the borrowers’ neck without a plan to pay back. Examples of such debt credit cards. Using credit card to pay living expenses isn’t advisable especially if the balance is not paid in full within the interest free period.
Another example of debt that do not yield value or create is personal loan depending on what it is used for. Buying a car with personal loan is not efficient. Good debt however are debts used to buy assets that generate value and income overtime. It also has the potential to increase in value.
2) Control cash flow: In this scenario, the debtor is advised to fashion out means of utilizing the surplus from his cash flow to offset his loan. This person can achieve this by increasing the repayment frequency, increase the repayment amount and transferring salary into the loan.
The debtor is advised to utilize all available cash into settling the debt to reduce the interests on the loans. Due to the fact that the Loans are calculated on the daily loan balance and then added to the loan balance monthly, the debtor can reduce his debt balance by;
I) Increasing the repayment frequency. Paying many times before the month runs out is a good and effective way of reducing the interest payable on a loan.
II) Increasing the repayment amount. Increasing the amount you pay on each installment can help to reduce the total loan amount.
III) Pay salary into loan. Paying one’s salary into the loan is another faster means of reducing debt. This also results in the increase of the repayment amount and ensures that the payments are more regular.
3) Effective use of cash reserves. People who have other sources of revenue are advised to channel such funds into servicing their debts.
4) Debt consolidation: This means taking out a new loan to pay off other liabilities. Debt consolidation enables one to harmonize their debts by taking out a bigger loan to settle all outstanding debts and channel all other resources to paying off the single loan.
Effective use of lump sum. A debtor who has received a cash gift, a bonus or has won a lottery can plunge the lump sum into their loan to pay it off. Others include Debt recycling, Tax efficiency of investment loans, Prepay interest etc.
Debt management is an important tool when dealing with massive debt obligations, but it is not a magic bullet. It is not used for secured debts. Debt management cannot stop further bills from coming in. Debt management works best if you have enough streams of income to cover even the recurrent expenditures.
Your debt management counselor may succeed in convincing your creditors to agree to a lower interest rate or to cut down on the total amount of the debt, you still have to stick to the payment schedule.
This is because defaulting on the payment plan may lead to termination of the concessions you have gotten.
Does Debt Management Affect Credit Score?
Yes. If not properly handled, debt management can have a negative effect on your credit score. For instance, if you miss payment date, it will reflect on your payment history. Missing payments will cause your credit score to drop significantly.
Other Options To Consider When Dealing With Debt
When you are thinking of ways to handle your debts, you should find the one that best suits your current financial situation. These options include:
Balance transfer credit card
Balance transfer credit cards help people to manage their credit card debt. These cards offer zero interest for a while. Using these cards means that the debtor will not be charged for sometime usually known as grace period.
This will give you the opportunity to pay off your debts without having to pay interest.
Balance transfer cards are available if your credit score is looking good, but you could have a hard time getting one if your credit score is not so good. You also need to clear your debt before the grace period ends else you will pay the normal interest fee and charges as applicable.
Personal loans
You can apply for personal loans that will be used to pay off your debts at once. Taking a huge loan to pay all outstanding debts is helpful if you know that you need more time to control your debts.
Personal loans have a longer repayment period. You will have to pay off the loan at the end of the specified period.
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