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What is an Informal Debt Solution?

What is an Informal Debt Solution?

For you to be eligible to a debt management plan, there are certain criteria that should be followed.

At some point in our lives, acquiring a loan may seem quite inevitable, but that is not a problem. The big challenge comes when we need to clear these debts. In the UK, there are various ways in which you can look to get help for any debt problems. The repayment solution you choose all depends on your financial capabilities and the agreement between you and your creditor.

Debt solutions are categorised into formal and informal. The informal debt solutions are not legally binding. There is also a chance to alter the terms of the payment contract between the debtor and creditor as long as this happens within a month of the initial agreement. The downside of informal payments is that they do not offer the same protection for the debtor as formal agreements with the creditor under no obligation to agree to any reduces repayments or freeze interest or service charges.
They are a number of ways to repay your debt informally. One of them is called token payments. As the name suggests, the debtor pays the creditor a pre-agreed amount of money on a weekly basis. If there are multiple creditors, you get to pay tokens proportional to the amount of debt owed to each creditor – meaning, the creditor owed the most debt ends up getting a larger token. Token payments help you remain committed to repaying your debt. They also prevent you from falling bankrupt since you only have to take out a token of the money you have, rather than having a huge one-time loan repayment plan.
A debt management plan is another informal debt solution. This involves paying a pre-determined amount to the creditor on a monthly basis. Just like the token payments, you pay out more to the creditor you owe the most. This goes on until the full amount is paid inclusive of interest.
For you to be eligible to a debt management plan, there are certain criteria that should be followed – minimum debt level is normally around £1500 you should have not less than two creditors and you have to be in a position to afford over £50 every month to the repayment of your debts.
In addition, before entering a debt management plan, consider the short-term and long-term effects it will have on you. Short-term effects include not being able to take another loan before full payment of the current one. The plan also does not protect any of your assets. If the plan involves a debt management company, then a certain amount of fee is paid to them for as long as the debt exists. This may lengthen the period it takes to complete repayment.
Long-term effects could be that a default is added to the credit file. This can make it more difficult to acquire credit in the future. Secondly, if the agreement does not involve freezing of interest charges, then both the loan and the interest have to be cleared before you are declared debt-free.
Understanding the terms of an informal debt solution is key before entering into any repayment plan. You get to choose a plan that is favourable to you so that you experience no financial strain.

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