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Debt advice: you can get something for nothing

Half of people who pay fees for debt management plans don’t know they can set up these plans for free. Worse still, research has found that plans set up by fee-charging companies are more likely to fail than free ones.

The survey commissioned by Lloyds Banking Group and the Money Advice Trust found that people struggling with debt often make decisions out of distress, and don’t shop around for the best debt solution.

It’s easy to understand why – it takes a lot of bravery to face up to debt problems. Having made the difficult decision to do so, many people respond to the first friendly TV advert they see. The relief of taking action can block out any thoughts of comparing the alternatives.

It doesn’t pay to pay

The survey also found that around one in ten people paid all their fees up front. I think this is unacceptable – that money could be used to pay off the individual’s debt, rather than pushing them further into it. For example, one interviewee from the survey had made two upfront payments of £662 just for setting up their plan.

Our latest Quarterly Consumer Report revealed that 11.3 million households have borrowed money or taken out additional debt in the month before. In addition, 800,000 households took out a new credit or store card in that time, and a similar number took out a payday loan.

That’s a huge number of people who may need debt advice at some point. As it is, one in four consumers will be cutting spending on essentials, while one in three have no money left at the end of the month. So when you’ve cut back as far as you can, where do you turn next?

Find advice for free

Hopefully, the answer should be one of the free debt advice organisations like National Debtline, StepChange Debt Charity (formerly known as the Consumer Credit Counselling Service) and Citizens Advice. If you or someone you know is struggling with debt, point them towards one of these organisations before they pick up the phone to a poor-value fee-charging company.

I never tire of repeating the debt mantra: why pay for something that you can get free, and better, elsewhere? Have you ever had experience with an expensive debt management company? Were you aware that free alternatives were available?

Comments
Member

I assume the reason is that those offering free plans aren’t advertising on TV. I’ve seen several adverts offering debt services, but even though they have free phone numbers I’ve always assumed there’s a fee involved. Guess I’m lucky never to have needed one. Although prudent planning doesn’t really involve any luck.

Member
Alan Stuart says:
6 November 2012

Most good commercial DMPs don’t advertise on TV and gain most of their customers through recommendation which pretty much defeats your argument. You also seem to overlook the massive fees so-called ‘free’ charities and companies charge for their IVAs . There is much more to the questions raised here than meets the eye – and certainly much more than is apparent from your ‘research’.

Member
StepChange says:
6 November 2012

The lack of awareness of the free alternatives to fee-charging firms was a central factor in Consumer Credit Counselling Service becoming StepChange Debt Charity. In our research (http://bit.ly/RGjZ1W) we identified that there are 6.2 million households in financial difficulty or at risk of getting into financial difficulty. It is essential that these people are aware of the free and impartial advice that is available to them.

Member
Alan Stuart says:
6 November 2012

IVAs from CCCS / StepChange are not a ‘free alternative to fee-charging firms ‘ – even according to their own website they charge the ‘industry average’.

Member

One piece of research I’d like to see is an objective test of the debt solutions mentioned, explored and ultimately offered by different organisations, both fee-charging and free-to-consumer.

I mystery shopped leading fee-charging debt solution providers a few years ago and was shocked by how quickly I was led down an IVA-only or DMP-only route, even though my scenario should have led to at least a discussion of bankruptcy. At the time I could only conclude that the solution was driven largely by the fees available.

Of course, things may since have changed. If anyone knows of a reputable recent study, could you let me know?