There is large difference between debt management and debt consolidation. While both are viable repayment strategies, it is important to understand the distinction between the two before making a decision as to which solution will work best for you. It is also important to understand your own financial situation prior to making the decision, as your finances will play a major part in determining your elegibility for either debt management or consolidation.
The main difference between debt management and debt consolidation is mostly a matter of repayment method. In both cases you must pay back the the money you have borrowed, however the length of the repayment period, interest rate, and long-term plan will vary based on what strategy you choose. Think of it this way: when you manage your debt, you commit to pay off your debt in realistic increments in exchange for better interest rates, lowered totals, or other incentives from your creditors. When you consolidate your debt, you simply shift the entire debt, which may be owed to several creditors, to a single lender with more favorable rates.
What You Need to Know
With debt management, the debtor works with a credit counselor to create a reasonable repayment plan based on the individual’s monthly income and expenditure. The debtor sends a single payment to their debt management agency, which then delivers payment to individual creditors. Debt management is a good option for individuals with moderate levels of debt who want to come up with a plan to eliminate the debt over a period of time. It involves a combination of money management skills and financial planning that can prove beneficial to debtor long after they have paid off their initial debt.
Debt consolidation is somewhat different. It involves taking out a large loan in order to pay off several debts at once, with the debtor agreeing to repay the back the single loan rather than several creditors at once. Consolidation is popular due to the fact that interest rates on a single loan can be more lower than paying variable interest rates on several credit cards, for example. Like with debt management, the debtor makes a single payment per month. However the money goes directly to the institution which issued the loan, rather than back to the different creditors. These institutions can include banks or various credit card companies that offer lower-interest rates. However consolidation can also be more expensive in the long run if it is necessary to use an asset, such as your home, as collateral when taking out the loan.
It is very important to understand that neither management nor consolidation are magic solutions. They both involve long-term commitment to repaying your debts and both can take years to completely pay off. You should also remember that there are many unscrupulous debt management and consolidation companies that will charge you a steep fee for using their services without actually paying off any of your debt. Knowing the difference between the two solutions and researching individual companies before enrolling in any programs will help you avoid the pitfalls many debtors often fall into.
When to choose Debt Management
Debt management involves the creation of a debt management plan, and is usually done in conjunction with a credit counselor. Debt management plans take into account your current debt, monthly income, and cost of living expenditures in order to generate a realistic, long-term repayment plant. Debt management plans also involve working with creditors to find the best solution possible. This can include anything from settling the debt or freezing interest rates for individuals experiencing financial difficulties.
Excluded from debt management plans are secure debts, such as car and house payments. Instead, the debtor and their counselor factor those debts into their monthly expenditures and instead work to negotiate a settlement deal with creditors and lower the total amount of money owed. The debtor agrees to pay a set amount of money to the debt management agency each month, with the agency making sure payments are still meted out to the appropriate creditors each month.
You should consider investigating debt management plans when you have a moderate amount of debt (generally identified as over $10,000 but less than $30,000), but are still struggling financially. Credit counselors and debt management professionals are invaluable resources for individuals who lack the knowledge to manage their own finances. Reputable counselors will help you form strict payment schedules and act as an advocate for you when corresponding with creditors. Debt management can help you understand how to eradicate what previously seemed like insurmountable financial obligations and assist you in learning how to create a budget and stick to it each month.
Debt management companies will often charge an enrollment fee, but shouldn’t require you to sign any contracts unless they are for-profit organizations. In addition, for-profit debt management agencies may charge a monthly fee for their services, but there are several non-profit agencies that will assist you in formulating a debt management plan entirely for free.
When to choose Debt Consolidation
Debt consolidation is an attractive option for many individuals with substantial levels of debt because it can transform several monthly bills into a single payment, as well as reduce the monthly minimum payment by stretching the repayment period over a longer time frame. Many banks offer debt consolidation loans, but your eligibility depends on the bank’s faith in your ability to pay. This is why many debtors choose to take out home equity loans in order to consolidate their debt.
If your credit has already been damaged, it may be difficult to get a loan with a decent interest rate or even be approved for a loan at all. One way to negotiate a low interest rate is to put up a tangible asset, such as a home mortgage, as collateral. Keep in mind, however, that if you do default on a loan, your property may be at risk for foreclosure. Therefore if you are simply attempting to shift debt from one creditor to another without intending to pay back the loan in a timely manner, consolidation can cause you trouble in the long run.
When considering debt consolidation, one of the most important factors to consider is the interest rate on the loan you are applying for. If the only interest rate you can receive is higher than that on your multiple credit cards, stay far, far away. You will end up paying more in the long run than you would if you chose to go with debt management, even though it may simplify your problem in the present.
If you can find a loan with low interest rate that will not risk your assets, debt consolidation is good bet for you. However, should this not be the case, it may be more in your interest to pursue debt management rather than consolidation.
Sources:
Will Debt Consolidation Help Me Get Out of Debt?
Your 3 Worst Debt Consolidation Moves
Negotiating with your Creditors
Debt Consolidation Programs
Inception of New Debt Relief Programs Helps Consumers
