Debt Management & Debt Freedom

With personal debt nearing the £1.5 trillion mark, the average UK citizen is spending more than ever servicing their debts.

• In 2007, according to Unbiased.co.uk, 1st February was Debt Freedom Day - the day when the 'average person' had earned enough to pay the annual interest on their debts.
• In 2008, the website announced that 10th March was Debt Freedom Day.
• In 2009, it fell on 25th March - nearly three months into the year.

Debt management - reducing the cost of debt

When they simply can't afford the monthly payments to their debts, many people turn to debt management. They - or a debt management organisation acting on their behalf - will get in touch with their lenders and ask if they can help them repay their debts at a rate they can afford.

There are various things a lender can do to help. First of all, they can agree to accept lower monthly payments, helping the borrower stay on top of their unsecured debt payments without 'eating into' the funds they need for essential spending such as mortgage/rent, food, utility bills, etc.

As well as accepting lower monthly payments, each lender may well agree to reduce the interest rate they're charging on the debt. Depending on the individual's circumstances, they may even agree to freeze interest for a period of time. This can have a huge impact on the borrower's finances in the long term - the Debt Freedom Day figures show how much many people are spending on interest every year, so it's easy to see how a reduction in the interest being charged can make a big difference.

Debt management - one way to take control of debt

Reducing monthly payments to an affordable level and reducing interest rates so the debt doesn't grow so quickly (or at all), debt management can give the borrower a real chance to take control of their debt and start paying it off at a realistic rate.

However, it's always worth talking to a debt adviser first, since debt management isn't always the best approach. Sometimes, it won't even be an option, as lenders won't agree to new repayment terms unless a borrower genuinely can't make the payments they'd originally agreed to. Plus, repaying any debt more slowly will obviously delay the day it's paid off once and for all, and may increase the overall cost of the debt - unless the interest rate is reduced by enough, the total cost will be higher, as the debt will spend longer accruing interest.

Finally, there's the question of credit rating. Whenever a lender issues a default notice because the borrower doesn't keep up with repayments as originally agreed, this will stay on their credit rating for six years, which can affect the cost and availability of credit.