A Debt Management Plan is not a kind of loan, and taking out a Debt Management Plan is not a process of replacing one kind of debt with another. Put simply, a debt management plan places your unsecured debts with a third party who deals with these unsecured debts on your behalf.

A Debt Management Plan is not a legally binding agreement and no credit check must be completed in order to take out a plan.

If you are currently struggling to pay back increasing debt there may be a temptation to resort to an unregulated loan, but beware such means. Unregulated loans can lock consumers into agreements for years and leave them at the mercy of massive exit charges.

According to reports by the UK Insolvency Helpline’s advice team a growing number of people are losing control of their spending and falling into greater debt. It is said that on average, people who people who contact the Insolvency Helpline owe £31,000 (excluding mortgages), compared with £29,000 in 2004.

This rising trend is cause for alarm and a signal that more of us will need to reduce interest and actively manage our debt more successfully. It is also suggested that the increases means that more of us will be forced to resort to such dangerous solutions as unregulated loans.

Unregulated loans, as their name suggests, are not governed by the same jurisdiction as other similar products and there are no safeguards to protect the consumer’s interests like there may be with other loans. Typically, these loans are made to individuals, outside any mortgage arrangements, for amounts of up to £25,000.

The constraints of the Consumer Credit Act are only enforced upon loans of up to £25,000, meaning that for loans which exceed this amount lenders are free to impose excessive fees or conditions onto their customers. This is not the case with a Debt Management Plan.

Such protection is particularly valuable when borrowers wish to pay their debts off within a shorter timescale. According to the Consumer Credit Act, lenders cannot charge a fee of more than one month’s interest for early payment of debt. Furthermore, where the remaining term of the loan is one year or less, no charge can be applied. This, however, has no bearing upon unregulated loans and customers may find it extremely difficult and financially dangerous to attempt to exit their payment plan early.

While mortgages usually involve sums of more than £25,000, the Financial Services Authority provides similar protection to a regulated loan. One of the rules concerning mortgages dictates that if a customer pays their arrangement early or falls into arrears, the charges they will incur are limited to the costs that the lender themselves incur.

No such safeguards apply to borrowers of unregulated loans. Unregulated lenders include convoluted and costly repayment penalties in the small print of their contracts.

Customers are at the mercy of interest rates for the duration of their loan, and worse, charges and penalties can lock customers into their risky plans for many years.

A Debt Management Plan is not a loan and not a dangerous situation. Their terms might not suit every circumstance, but could be the solution to your debt problems long term. Simply speak to a debt management plan professional about your own circumstances to see if a debt management plan could be the solution for you.