If you currently find yourself in debt and are not sure how to handle it, don’t worry. We are here to help and tell you that you are not alone in this.
According to a report by the Federal Reserve, the US credit card debt has reached a new high. Moreover, in Australia, household debt has been steadily rising over the last 30 years. The situation is similar in the UK as well, as more and more people are asking for help with their debt.
So, if you want to stop contributing to this growing trend, it’s good to know that you have options. When it comes to dealing with debt, debt management plans, debt consolidation loans and bankruptcy all offer a way out, so to speak. While bankruptcy is not the end of the world, this choice most often comes down to the first two options. However, it is important to understand the difference between them before you make your decision on which approach you will take.
What is debt management?
A debt management plan (DMP) is an option offered by credit counseling agencies. These agencies are nonprofit organizations that can give you advice on budgeting, credit management as well as help you form a financial plan.
It is vital that you understand how this approach works. Agencies will try to negotiate with your creditors in order to reduce or waive interest rates and finance charges, which can result in lower monthly payments. Bear in mind that your creditors are under no obligation to say yes to this deal. However, if the agency manages to come up with a solution, you will have just one payment a month. This means that you deposit the money into the agency’s account and then they make payments on your behalf. Be aware that the agencies charge a fee, so look into your options.
You have to keep in mind that these programs last from 36 to 60 months, depending on your debt and the agreement between your creditors and the credit counseling agency. On the other hand, this means that your debt will be repaid in full after this period.
Probably the most important thing about debt management is the fact that it is not a loan. You do not borrow more money; you use your own money to repay what you owe.
What is debt consolidation?
Debt consolidation means taking out a new, larger loan which will allow you to refinance multiple debts. When it comes to taking out a debt consolidation loan, you can turn to a credit union or a bank as well as online loan companies.
Deciding to consolidate your debt means that you will have just one monthly payment with lower interest rates. However, it is important to remember that this option only moves your debt to another place. You have to make regular payments and avoid getting into more debt in order for this to work.
Moreover, before getting a loan, make sure to check whether it is secured with any of your assets (car, home, retirement account). Do not accept a loan if you are not sure you will be able to repay it as you do not want to lose your possessions.
When to opt for debt management?
In case you have unsecured debts, a debt management plan might be the right option for you. It is typically used for paying off medical and utility bills, personal loans, as well as credit card debt. Seeing as how secured debts are not allowed on DMPs, you will have to manage your car and mortgage payments on your own.
There are some factors that can tell you whether you should opt for this approach. For example, your debt-to-income ratio. If it is high, you should look into a payment plan. Another thing to keep in mind is your credit score. In case it is below 620, you might not be able to qualify for other options, such as consolidation loans, seeing as how some lenders do not want to work with people with a low score. That makes debt management your best option for paying off your debts.
When to opt for debt consolidation?
Debt consolidation loans are used to pay off various unsecured loans, from credit cards to gambling debts, as well as some secured debts, such as car loans.
If you notice that you are slowly falling behind with payments, it might be time to consider this option. Take into account the interest rates of the new loan. If they are not any lower than your current ones, there is no point in consolidating. Will your monthly payments be smaller than they are now? Will you be able to pay off the debt quicker? You should consider all of these factors.
What you have to know about debt management
First of all, as we already mentioned, your creditors do not have to offer you better terms and eliminate late fees. That means that you will have to pay certain debts on your own instead of through the agency. So, keep in mind that this approach only makes sense if most of your creditors decide to work with the credit counseling agency.
Even though the agencies are nonprofit businesses, you still have to pay a fee. Seeing as how they vary in quality, you have to look into different agencies before opting for one to do business with. Moreover, sometimes, you can even contact your creditors directly without involving an agency.
If you decide to enroll in a DMP, you will not be able to apply for new lines of credit. This means that all your accounts (but one, for emergencies) will most likely be closed in order to avoid more debt. Additionally, if you miss your payments to the agency, the agreement could be voided.
What you have to know about debt consolidation
Seeing as how lenders usually expect a good credit score before they decide to give you a consolidation loan, beware of scams. If someone’s offer sounds too good to be true, make sure you properly research them before signing any documents. You might end up paying way more than you should.
In addition, keep in mind that this is not extra money for you to spend. A lot of people get tempted by the newly available credit and get themselves even deeper into debt. If you think that you will not be able to resist, it’s better to close your accounts. It might affect your credit score, but that’s better than going into more debt.
Even though debt management and debt consolidation are two different approaches to dealing with debt, some people confuse them and describe them in a similar way. That is why you have to learn the differences before you agree to any conditions. Find the best option for yourself and get rid of that debt!