Debt Consolidation vs. Debt Management – Know the Difference

If your debt is getting out of hand, it’s likely that you may need to look into debt relief options. Fortunately, there are various options available, but the choice usually comes down to either debt consolidation or debt management. Both are pretty practical options and can help you get out of debt – although they each rely on different methods to do this. Here’s a quick comparison of these two debt relief options.

Debt Management

A debt management plan or program helps you eliminate debt by taking the help of a credit counseling agency. In this case, you will need to make payments, usually on a monthly basis, to the credit counseling agency, which will use the money to pay your creditors as per an agreed-upon schedule.

Lenders and credit card companies usually lower their rates and relax additional charges to help consumers pay off their debt through the credit counseling agency. Keep in mind that a debt management plan is not a loan. You will not be getting another loan or a line of credit to repay your debts during the process.

While a debt management plan can help you get out of debt fast, you will need to make the due payments to the credit counseling agency as per the schedule. Missing any payments could void the reduced interest rates and fees.

Debt Consolidation Loan

Debt consolidation essentially involves taking out one large loan or using a balance transfer credit card to repay all your debts. In place of multiple debts, you will now have to pay back one loan. If the new loan you intend to take has a lower rate of interest compared to your current debts, you could save money on interest payments. The biggest advantage of debt consolidation is that it makes repayments a lot easier. Instead of paying several creditors at different times over the course of the month, with a debt consolidation loan, you can make a single monthly payment to one creditor.

Keep in mind that you may have to pay an early payment penalty when repaying your current debts. If this penalty is too high, debt consolidation may not make sense.