Taking out a loan during a debt management plan (DMP) (2024)

FAQs

Taking out a loan during a debt management plan (DMP)? ›

Getting a loan or mortgage while on a DMP is possible, though not always advisable. The longer you are successfully paying down your debt, the better the chance your credit score improves and with it, terms for a new loan or mortgage. However, if you're trying to buy a house, you'll need a down payment.

A debt management plan affects your credit file. Most mainstream banks and lenders will be reluctant to lend to you once they see your credit file and they know you are on a debt management plan. The plan works by you making reduced payments, so defaults will appear on your credit file.

Do not take out any more credit while trying to repay existing debts through a DMP. This risks breaching the terms of your plan. Your budget should cover all costs that might crop up on a DMP so you do not need to borrow. Speak to your DMP provider if you have an unexpected high expense.

If you find yourself heavily in debt, you might turn to a debt management plan (DMP). These programs can help you get out of debt, but they are not free of risk. One implication being your ability to apply for new products such as a mortgage or auto loan while paying down your debt.

There is no rule saying you cannot buy a car during a DMP. But: Check with your DMP provider before taking out credit to buy a car. It could affect your plan.

As mentioned above, a DMP will usually lower your credit score. Having a low credit rating doesn't make it impossible to get a mortgage, but it does make it harder. It also makes getting a mortgage more expensive, as lenders are more likely to charge a higher interest rate.

Can you get a mortgage with a debt management plan? Yes, you can, but it greatly depends on your circ*mstances. With a debt management plan, one of the most important things that lenders will look at is whether or not the DMP is still active and, if not, how long ago it was satisfied.

Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.

There's no maximum or minimum debt level needed to enter a DMP, but there are some things to consider before applying. A DMP is good for those who are struggling to keep up with their debt repayments, but who can afford to consistently pay smaller amounts over a longer period of time.

No new lines of credit: While enrolled in a debt management plan, you typically cannot open any new lines of credit, such as an auto loan or a personal loan. Creditors may not participate: Not all creditors will agree to participate in a debt management plan. Student loans and secured debt is often excluded.

Can you buy a house while on a DMP? ›

If you want to buy a home while on a debt management plan, you should talk with your credit counselor. Since some debt management plans raise red flags for lenders, the homebuyer might not qualify for a prime interest rate. Higher interest can add substantially to the monthly payment.

Most credit card issuers will require that an account entering a debt management plan be closed. It may be in your best interest to reach out to creditors first and request that your accounts be closed. You may be allowed to keep a card for emergencies or business, though; ask before you sign up.

How Does a Debt Management Plan Affect Your Credit? The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.

The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.

You're required to close your accounts

Any credit card that is included in your DMP is required to be closed. Here's how it works — the creditor, which is typically a bank or other financial institution, works with MMI to create a DMP, which usually includes reduced interest rates on your credit card accounts.

So, that's the tradeoff that creditors expect. You can't make any new charges on your existing accounts or get new credit cards until you complete the program.

For example, if your mortgage and/or auto loan are what's dragging your finances down, a DMP won't help, as those debts are secured by your house and your car. Debt management plans address unsecured debt – debt without collateral -- such as credit card balances and personal loans.

Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.