Debt management plans (DMPs) created by fee-charging companies are more likely to fail than arrangements that don’t involve a cost, according to research from a charity and a major bank.
The study, which was conducted by Loughborough University for Lloyds Banking Group and the charity Money Advice Trust, said that this reflected the poorer practices being used by firms that charge, as well as the extra costs associated with the plans.
The study interviewed 1,003 people who were either currently on an informal arrangement to pay creditors, including debt management plans, or on a debt arrangement scheme, or had been in the past five years.
One respondent revealed that they had made two payments of £662 for setting up a fee-charging plan.
Another interviewee was found to be paying £400 each month into a debt management plan, of which £300 was being kept as a fee by the debt management firm.
It revealed that people with free DMPs were clearer about repayment levels and plan length, while individuals on fee-charging plans had a less clear grasp of what their plans entailed.
The findings also showed that half of people who are being charged fees for a debt management plan were not aware that there were free alternatives.
Joanna Elson, chief executive of the Money Advice Trust, said that consumers should be able to pay for debt advice if they choose but that the decision should be an informed one.
“The research makes clear that around half of those paying for debt help are not aware of the free alternatives.
“In times when free, charity providers of advice are facing tight budget squeezes, whilst the marketing budgets of fee-charging debt management companies seem to grow exponentially each year, we have to be very careful that this 50% figure does not grow any further,” she added.
Around one in 10 people, or 9% of those surveyed had paid all their fees upfront.
According to the research, there is a risk that private companies organising DMPs will go bankrupt, disappear or turn out to be bogus businesses before any monthly payments are passed onto the creditor.