Debt Consolidation vs Debt Management: Choose The Right Option
Guest Post by Camron Hoorfar – Debt consolidation vs debt management are methods used to deal with debts in an effective way so that you can pay them off as quickly as possible.
Read more to learn which option is best to get help for debt relief.
What is Debt Management?
It is a program that combines different credit card debts and allows you to pay a single monthly payment with a new interest rate.
This debt management plan can last for more than three years.
Generally, you are not allowed to get new credit cards or use any credit during the payment duration.
Note that this plan only offers services for credit card debt, not medical bills, student loans, or personal loans.
The following are some reasons to opt for Debt Management.
- More debt than you can consolidate
- Considerable credit card debt
- Lower credit score that is preventing you from availing of other debt consolidation options such as debt consolidation loan or balance transfer credit card
Advantages of Debt Management
In the case of the debt management plan, you only have to pay for a single monthly payment.
Additionally, this debt managing program offers you several flexible options.
And since it’s an informal plan, the creditors can make changes to facilitate you based on your needs.
For instance, if your salary reduces unexpectedly, they can decrease the monthly payments.
On the other hand, if your salary increases, you can clear your debts faster.
Freeze Charges and Interest Rates
Depending on your creditor, you can also freeze your charges and interest rates in this place.
This way, you can easily focus on paying your debt amount rather than paying additional costs.
No Contact with Creditors
Once you take the debt management plan and your creditor agrees to this plan, creditors don’t have permission to reach out.
They can’t communicate with you and can’t force you to pay the debts quickly. In other words, you don’t have to worry about life threats or other dangers and continue paying your debts without any worries.
Disadvantages of a Debt Management
Don’t Have Legal Bindings
You need to understand that debt management programs don’t have any legal bindings.
This means that if creditors don’t accept it, they don’t have to face any punishment from the state or government.
Similarly, they are not obliged to freeze charges and interest rates. Unfortunately, they can even stop following the agreement.
Covers Non-Priority Debts
Debt management plans only offer you services for non-priority debts.
This includes expenditures such as personal loans, credits cards, and catalogs.
Furthermore, you need to look for alternative financing options for loans and debts like council taxes, utility bills, mortgages, and others.
Affects Credit Score
When you sign the agreement of the debt consolidation plan, it can affect your credit score rating for either the short or long term.
Repaying debt through this method for a longer period will also increase your repayment amount and time.
What is Debt Consolidation?
Like debt management, a debt consolidation plan helps you roll different debts into one debt.
In most cases, you have to pay a lower interest rate. It also offers you several methods to consolidate debt, such as personal loans, home equity loans, balance transfer credit cards, 401 (K) loans, personal loans, and others.
Note that the type of debt consolidation you can avail predominately depends on your credit score.
For instance, to qualify for a balance transfer credit card or personal loan with a lower interest rate, you will need an excellent credit score.
Here are some reasons to opt for this plan on others.
- Manage your monthly payments of debt properly
- Easily qualify for the lower interest rate
- Consolidate all your major debts
Advantages of Debt Consolidation
Single Monthly Payments
Instead of paying several times on different days and different amounts, you can make all your payments at once.
When you have to take out a personal loan to pay all your credits and interests rates, you have to make one payment every week, fortnight, or month depending on what you choose.
Hence, managing debts become easy and accessible.
Fixed Rates and Terms
Personal loans with a fixed term and rate will keep your finances organized and help you pay off your debt quicker.
But try to avoid picking a payment schedule that doesn’t fit your requirements and needs.
Lower Monthly Payments
Opting for a longer term to pay off your debts help you spend less money on your debts monthly.
As a result, you can easily spend your month and deal with your expenditures without taking more debts to pay for necessary daily items.
Disadvantage of Debt Consolidation
Lead to More Debts
Since you can take more credits after getting debt consolidation, there is a risk of accumulating more debts.
You need to control yourself and avoid spending more than you can pay off.
Freedom of Higher Expenditures
As discussed, you get a personal loan with a longer-term that lowers your monthly payments.
This way, you have more money to spend on a monthly basis, which can lead to additional expenditures.
Damage Credit Score
You don’t pay your monthly payments on time; you may damage your credit score.
As a result, it may lead to financial hardships.
Debt Consolidation vs Debt Management: Which Strategy Is Right for You?
Both the options have their own perks and drawbacks. You need to choose one that goes well with your financial condition.
A debt consolidation loan is best for you if you have a higher credit score and a great amount of debt.
On the contrary, a debt management plan is ideal for individuals with higher debts that will increase over time.
Get help for debt relief by considering all the aspects.
Make sure to think about how much you can pay and what interest rates you can easily deal with.
If you have a large amount of debt and find it hard to manage, it’s better to get help for debt relief.
Choose between debt consolidation vs debt management, and sign for one to get rid of the debts.